RSI
A momentum oscillator from 0 to 100 that compares the size of recent gains to recent losses.
Also called: relative strength index · overbought · oversold
Written by Javier Sánchez Ros
In plain language
RSI measures the ratio of average up-moves to average down-moves over a lookback, usually 14 periods, and scales the result between 0 and 100.
Readings above 70 are conventionally called overbought and below 30 oversold. Those labels are widely misread: they describe momentum, not valuation, and not a reversal.
In a strong trend RSI can sit above 70 for weeks. Selling every overbought reading in an uptrend is one of the most reliable ways to lose money with an indicator.
Worked through
Shorting an RSI of 78 in a strong uptrend
- RSI reading
- 78 — "overbought"
- Short taken at
- $41.00
- RSI six sessions later
- 84
- Price six sessions later
- $47.30
Overbought is a description, not an instruction. It says the recent gains have been large relative to the recent losses, which in a strong trend is simply what a strong trend looks like — and a trend can keep producing that reading for weeks.
This is the most expensive misuse of the indicator, because it puts the trader on the wrong side of exactly the moves that pay the most. Selling strength because a number crossed 70 means systematically shorting the strongest instruments on the screen.
The uses that survive scrutiny are quieter. Divergence — price making a higher high while RSI makes a lower one — is a reason to tighten a trailing stop on a position you already hold. And an extreme reading inside a range, where the boundaries are doing real work, is a different situation from an extreme reading in a trend.
In every one of those cases RSI is a modifier on a decision made elsewhere. As a standalone trigger to reverse direction it has cost more accounts than almost any other indicator, for the simple reason that it fires most confidently when it is most wrong.
Why it matters
RSI is most useful for divergence and for gauging whether a move still has force behind it — not as a standalone reversal trigger.
Common mistakes
- Shorting simply because RSI is above 70.
- Applying mean-reversion RSI logic during a strong trend.
- Ignoring that the same reading means different things on different timeframes.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
When price makes a new extreme but the indicator does not, suggesting momentum is fading.
A momentum indicator showing where the close sits within the recent high-low range.
A momentum indicator built from the difference between two exponential moving averages.
A sustained directional bias in price, built from a repeating pattern of highs and lows.
How much and how quickly an asset’s price moves over a given period.