RSI Explained: Reading Overbought and Oversold Signals

The Relative Strength Index (RSI) is a momentum indicator that measures the speed and size of recent price changes, displayed as a single line moving between 0 and 100.

How it’s calculated

RSI compares the average size of recent up-moves to the average size of recent down-moves, typically over a 14-period lookback. The result is scaled to a 0–100 range, making it easy to read at a glance regardless of the instrument or its price level.

Overbought and oversold

Readings above 70 are traditionally considered “overbought,” suggesting the price has risen quickly and may be due for a pause or pullback. Readings below 30 are considered “oversold,” suggesting the opposite. These aren’t automatic buy/sell signals — strong trends can keep RSI overbought or oversold for extended periods.

RSI divergence

Divergence occurs when price makes a new high or low but RSI doesn’t confirm it — for example, price hits a higher high while RSI hits a lower high. This can signal weakening momentum behind the move, though it’s a warning sign rather than a guaranteed reversal.

Common mistakes

Treating every overbought or oversold reading as an automatic trade signal is a common beginner mistake — in a strong trend, RSI can stay in “overbought” territory for a long time while price keeps climbing.

Key takeaway

RSI is best used as one piece of context about momentum, not a standalone trading system — pairing it with trend analysis or price action gives a fuller picture.