What Is the Relative Strength Index (RSI)?

7 min read

The Relative Strength Index, or RSI, is one of the most widely used momentum indicators, measuring the speed and size of recent price changes on a scale of 0 to 100.

Its simplicity and bounded scale are part of why it remains one of the first momentum tools most traders learn, well before moving on to more complex indicators like MACD or the stochastic oscillator.

What the scale represents

RSI compares the magnitude of recent gains to recent losses over a chosen period. Readings above 70 are conventionally described as 'overbought' and readings below 30 as 'oversold', reflecting a market that has moved a long way in one direction relatively quickly.

The specific thresholds of 70 and 30 are a convention, not a fixed law - some traders adjust them for a particular instrument's typical behaviour, especially one that trends strongly and often runs in extreme territory.

• 0-100 scale: RSI is bounded, unlike unbounded indicators such as MACD.
• Overbought (>70): Conventionally read as a market that has risen quickly in a short period.
• Oversold (<30): Conventionally read as a market that has fallen quickly in a short period.

Why 'overbought' doesn't mean 'sell'

A common misunderstanding is treating an overbought reading as an automatic signal to sell. In a strong trend, RSI can remain in overbought or oversold territory for an extended period while price continues in the same direction, so many traders treat it as one input among several rather than a standalone trigger.

This misreading is one of the more common mistakes newer traders make with RSI, often leading to fighting a strong trend based on the indicator alone.

• Not an automatic signal: Overbought or oversold alone doesn't guarantee a reversal is coming.
• Extended extremes in a trend: RSI can stay overbought or oversold for a long stretch during a strong trend.
• One input among several: RSI is generally used alongside other tools, not as a standalone trigger.

Divergence as an additional signal

Some traders also watch for divergence - where price makes a new high or low but RSI does not - as a sign that the momentum behind a move may be fading, even if price hasn't reversed yet.

Like other technical signals, divergence is treated as a warning to watch more closely, not a guarantee of an imminent reversal, since a divergent reading can persist for some time before price actually turns.

• Divergence: Price makes a new high or low while RSI fails to confirm it.
• Fading momentum: Divergence is often read as an early sign that momentum behind a move is weakening.
• Warning, not a guarantee: Divergence flags reduced conviction rather than confirming a reversal is imminent.