RSI
RSI, the Relative Strength Index, is a momentum gauge from 0 to 100 that flags overbought and oversold conditions. Learn how to read it and its limits.
RSI, the Relative Strength Index, is a momentum indicator that runs from 0 to 100 and measures how fast and how far a stock has moved recently. It is best known for flagging when a stock may be overbought (stretched too high) or oversold (pushed too low).
Think of it as a speedometer for price momentum. Let me show you how to read the dial.
A Speedometer for Momentum
RSI compresses recent price action into a single number between 0 and 100, based on the size of recent gains versus recent losses. A high reading means gains have dominated and momentum is hot; a low reading means losses have dominated and momentum is cold.
The two levels everyone watches are 70 and 30. Above 70, the stock is considered overbought: it has risen so fast that it may be due for a pause or pullback. Below 30, it is oversold: it has fallen so hard that it may be due for a bounce. The middle, around 50, is neutral. RSI is essentially asking, "has this move gone too far, too fast?"
How Traders Use It
RSI offers a few reads, and each has its place.
Overbought and oversold. The classic use: consider a stock stretched when RSI runs above 70 and beaten down when it drops below 30. Some traders fade those extremes, expecting a reversion, especially in range-bound markets.
Divergence. A powerful signal: when price makes a new high but RSI makes a lower high, momentum is weakening beneath the surface, hinting a reversal may be coming. The same in reverse can mark a bottom. Divergence is one of RSI's most respected uses.
Centerline and trend. In a strong uptrend, RSI often stays above 50 and treats 40 to 50 as support; in a downtrend it stays below 50. Watching which half of the range RSI lives in helps confirm the trend.
The Big Caveat
RSI is popular precisely because it is simple, but that simplicity hides a trap that catches many beginners.
Overbought does not mean sell. A strong trend can keep RSI pinned above 70 for a long time while the stock keeps climbing. Selling just because RSI is "overbought" can mean fighting a powerful uptrend and getting run over. Oversold works the same way in a crash: a stock can stay below 30 while it keeps falling.
That is why seasoned traders do not treat RSI extremes as automatic buy or sell buttons. They use RSI to gauge momentum and spot divergence, then confirm with the trend and other tools before acting. As one input among several, RSI is a sharp, quick read on whether a move is stretched. As a standalone signal, it can be a trap.
- RSI is a 0-to-100 momentum gauge of recent gains versus losses.
- Above 70 is overbought; below 30 is oversold.
- Divergence from price warns momentum is weakening.
- In a strong trend, RSI can stay stretched, so it is not an automatic signal.
Pop Quiz
Three quick questions to see what stuck. Pick an answer and the explanation shows up right away.
What does an RSI above 70 suggest?
Above 70, gains have dominated and the stock is considered overbought, potentially stretched.
What is RSI divergence?
When price and RSI disagree at the extremes, it hints the trend is weakening underneath.
Why is "overbought" not an automatic sell signal?
In a powerful uptrend RSI can stay stretched for a long time, so selling on it alone can fight the trend.
Bottom Line
RSI is a speedometer for momentum, a 0-to-100 gauge that flags when a stock has risen too fast (overbought, above 70) or fallen too hard (oversold, below 30). Its divergences from price are among the best early warnings that a trend is weakening.
The trap is treating its extremes as automatic buy or sell buttons. In a strong trend, RSI can stay stretched for a long time while price keeps going. Use it to read momentum and spot divergence, confirmed by the trend, and it becomes a sharp, quick read rather than a false signal.
Keep going: a similar oscillator is the stochastic, a momentum companion is the MACD, and all three are read against the trend.