The short answer
The Relative Strength Index (RSI) is a momentum oscillator that moves between 0 and 100, measuring the speed of recent price changes. Readings above 70 are called overbought and below 30 oversold — but the biggest beginner error is treating those as automatic sell and buy signals. In a strong trend, RSI can stay overbought for a long time. Its most useful application is divergence: when price makes a new high but RSI does not, momentum is weakening.
What is the RSI?
The RSI, developed by J. Welles Wilder, measures the speed and size of recent price moves and expresses it as a single number from 0 to 100. High values mean recent gains have dominated; low values mean recent losses have. The standard setting looks back 14 periods.
It is a momentum tool, not a price tool. It tells you how forcefully price has been moving, which is different from where price is or which way the trend points.
How it is calculated (briefly)
You do not need the formula to use RSI, but the idea helps: it compares the average size of up-closes to the average size of down-closes over the lookback, then scales that ratio to 0–100. A reading of 50 means up and down momentum are roughly balanced.
Because it is an average of recent moves, RSI reacts quickly but, like all indicators, is derived entirely from past price. It adds a lens, not new information.
Overbought and oversold — the trap
The textbook reading is: above 70 overbought (expect a fall), below 30 oversold (expect a rise). In a ranging market that can work. In a trending market it is a trap — a strong uptrend will pin RSI above 70 for a long time while price keeps climbing.
“Overbought” means momentum is strong, not that a reversal is due. Shorting into an uptrend because RSI hit 70 is one of the fastest ways to lose money with an indicator. Read the levels in the context of the trend, never against it blindly.
Divergence — where RSI earns its keep
The most useful RSI signal is divergence: price makes a higher high but RSI makes a lower high (bearish divergence), or price makes a lower low but RSI makes a higher low (bullish divergence). It says the new price extreme was reached with less momentum than the last.
Divergence is a warning that a trend is tiring, not a precise entry. Use it to anticipate a possible turn near a level, then wait for a real trigger before acting.
Using RSI with the trend
A more robust approach ignores the naive overbought/oversold trade and instead uses RSI to time pullbacks with the trend. In an uptrend, a dip in RSI toward 40–50 can flag a buying opportunity as momentum resets, rather than a top.
The centreline (50) matters too: momentum above 50 broadly favours buyers, below 50 favours sellers. Aligning RSI with the higher-timeframe trend beats fighting it at the extremes.
Settings and common mistakes
The default 14 is fine; shorter settings are noisier, longer ones smoother. Do not endlessly tune it — a period that looks perfect on past data usually fails forward. The bigger mistakes are conceptual: trading overbought/oversold against a trend, and treating RSI as a standalone system.
RSI is one input. Combine it with structure and price action, size every trade from the stop, and let it confirm decisions rather than make them.
Frequently Asked Questions
What does the RSI indicator measure?
The Relative Strength Index measures the speed and size of recent price changes on a scale of 0 to 100. High readings mean recent gains have dominated; low readings mean recent losses have. The default lookback is 14 periods.
What do overbought and oversold mean on the RSI?
Readings above 70 are called overbought and below 30 oversold. They indicate strong momentum, not an automatic reversal — in a trend, RSI can stay overbought or oversold for a long time.
Is RSI above 70 a sell signal?
No. Above 70 means momentum is strong, and in an uptrend RSI can stay there while price keeps rising. Selling just because RSI hit 70 against the trend is a common and costly mistake.
What is RSI divergence?
Divergence is when price makes a new high or low but RSI does not follow — for example price makes a higher high while RSI makes a lower high. It warns that momentum behind the move is weakening.
What is the best RSI setting?
The default 14 periods is a sensible choice. Shorter settings are noisier and longer ones smoother, but over-tuning to past data usually fails going forward. The setting matters far less than using RSI with the trend.