Trading term

What is RSI (Relative Strength Index)?

The RSI is a momentum oscillator that scores recent price strength from 0 to 100. Readings above 70 flag a market as 'overbought' — it has risen fast and may be stretched — while readings below 30 flag 'oversold.' It measures the speed of a move, not its direction.

Developed by J. Welles Wilder, the RSI compares the size of recent up-moves to recent down-moves over a set period (usually 14) and boils it into one number between 0 and 100. A high RSI means gains have dominated lately; a low RSI means losses have. It's drawn in a separate sub-pane below the price chart, with horizontal lines at 70 and 30 marking the classic overbought and oversold thresholds.

The most powerful use isn't the raw level — it's divergence. When price makes a higher high but RSI makes a lower high, momentum is fading even as price climbs, warning the move may be running out of steam (and the mirror image at bottoms). Note that in a strong trend RSI can stay 'overbought' for a long time, so an overbought reading is a caution, not a sell signal on its own.

RSI: overbought, and a bearish divergence
PRICEhigher highRSI (14)Overbought · 70Oversold · 30lower high → bearish divergence

RSI pushes above 70 (overbought) on the first rally. On the second, price makes a higher high but RSI makes a lower high — a bearish divergence warning momentum is fading.

For example

A stock rallies hard and its 14-period RSI hits 78 — overbought. That doesn't mean 'sell now,' but it warns the rally is stretched. If price then grinds to a new high while RSI only reaches 72, that bearish divergence is a stronger caution.

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Why it matters to you

RSI answers a question price alone can't: is this move gaining strength or quietly running out of gas? That early read on momentum — especially via divergence — is what lets traders anticipate a turn instead of chasing it after the fact. It's the most popular momentum gauge for exactly that reason.

⚠ Overbought doesn't mean sell

The biggest RSI mistake is shorting every reading above 70. In a strong uptrend RSI can pin above 70 for weeks while price keeps climbing — selling into that gets you run over. Treat overbought and oversold as context, and lean on divergence and price structure for actual signals.

Frequently asked questions

What is a good RSI level to buy or sell?

The classic thresholds are below 30 (oversold, a possible bounce) and above 70 (overbought, possibly stretched). But they're context, not triggers — in strong trends RSI can stay overbought or oversold for a long time. Most traders use them alongside price structure, not on their own.

What is RSI divergence?

Divergence is when price and RSI disagree. Bearish divergence: price makes a higher high but RSI makes a lower high — momentum fading under a rising price. Bullish divergence: price makes a lower low but RSI makes a higher low. It often precedes a reversal, making it RSI's most-watched signal.

What RSI period should I use?

The default is 14, as Wilder designed it. A shorter period (like 7) makes RSI more sensitive and jumpy with more signals; a longer period (like 21) makes it smoother with fewer, steadier signals. 14 is the standard most charts and traders default to.

What's the difference between RSI and MACD?

Both are momentum tools, but RSI is a bounded oscillator (0–100) that flags overbought and oversold extremes, while MACD is an unbounded indicator built from moving averages that highlights trend direction and crossovers. Many traders use them together — RSI for stretch, MACD for trend shifts.

Related terms

Ascending triangleAn ascending triangle is a bullish continuation pattern: a flat horizontal resistance line on top, with a rising trendline of higher lows beneath it. As the higher lows squeeze price against the ceiling, pressure builds — and it usually resolves with a breakout up through the resistance.ATR (Average True Range)ATR (Average True Range) measures how much a security typically moves in a period — its volatility — as an average of recent trading ranges. It doesn't say which direction price is heading, only how far it tends to travel, which makes it a core tool for stop-losses and position size.Bollinger BandsBollinger Bands wrap a price chart in three lines: a middle moving average with an upper and lower band set two standard deviations away. The bands widen when volatility rises and squeeze together when it falls, framing whether price is relatively high or low.BreakdownA breakdown is when price falls decisively through a support level it had been holding above — the bearish mirror of a breakout. It signals sellers have overwhelmed the buyers defending support, and often triggers a fast move lower as stops and new sellers pile in.
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