What is RSI?
The Relative Strength Index Explained
The Big Picture
RSI (Relative Strength Index) is one of the most popular technical indicators. It measures:
"Is this stock overbought or oversold?"
In plain English: Has the price moved too far, too fast — and might it reverse?
How RSI Works
RSI is a number between 0 and 100.
| RSI Level | What It Suggests |
|---|---|
| Above 70 | Overbought — price may have risen too fast |
| Below 30 | Oversold — price may have fallen too fast |
| 40-60 | Neutral zone |
100 ─────────────────────────────
70 ═══════════════════════════════ Overbought
╱╲ ╱╲
╱ ╲ ╱ ╲ ← RSI Line
╱ ╲ ╱ ╲
30 ═══════════════════════════════ Oversold
0 ─────────────────────────────
The Math (Simplified)
RSI compares recent gains to recent losses over a period (usually 14 days):
RSI = 100 - (100 ÷ (1 + RS))
Where RS = Average Gain ÷ Average Loss
You don't need to calculate this — every charting platform does it automatically. What matters is understanding what the number means.
How Traders Use RSI
1. Finding Overbought/Oversold Conditions
- RSI above 70 → Stock might be due for a pullback
- RSI below 30 → Stock might be due for a bounce
⚠️ Important: "Overbought" doesn't mean "sell immediately." Strong stocks can stay overbought for weeks. RSI is a warning sign, not a guaranteed reversal.
2. Divergence (Advanced)
When RSI and price disagree, something may be changing:
- Bullish divergence: Price makes lower low, but RSI makes higher low → potential reversal up
- Bearish divergence: Price makes higher high, but RSI makes lower high → potential reversal down
RSI in Action: Examples
Example 1: Oversold Bounce
Stock drops from $50 to $35 in two weeks
RSI falls to 22 (oversold)
Stock bounces to $42 over the next week
The low RSI signaled that selling was exhausted.
Example 2: Overbought Doesn't Mean Sell
Stock rallies from $100 to $150
RSI hits 75 (overbought)
Stock continues to $180 before pulling back
RSI warned of extended conditions, but the trend was strong.
RSI Settings
Default: 14 periods (14 days on a daily chart)
Some traders adjust this: - Shorter period (7): More sensitive, more signals, more false alarms - Longer period (21): Less sensitive, fewer signals, more reliable
For beginners, stick with the default 14.
Common Mistakes
Mistake 1: Selling just because RSI is high In a strong uptrend, RSI can stay above 70 for weeks. Use other confirmation.
Mistake 2: Buying just because RSI is low In a strong downtrend, RSI can stay below 30 for weeks. "Oversold can get more oversold."
Mistake 3: Using RSI alone RSI works best combined with other analysis — trend, support/resistance, volume.
RSI + Other Indicators
RSI works well with:
| Combine With | Why |
|---|---|
| Support/Resistance | RSI oversold AT support = stronger signal |
| Trend | RSI overbought in uptrend = different than downtrend |
| Volume | High volume + extreme RSI = more significant |
| Moving Averages | RSI oversold + price at 200 MA = potential bounce |
Quick Reference Card
| RSI | Signal | Action |
|---|---|---|
| > 80 | Extremely overbought | Strong warning |
| 70-80 | Overbought | Caution |
| 40-60 | Neutral | No signal |
| 20-30 | Oversold | Watch for bounce |
| < 20 | Extremely oversold | Strong watch |
Practice Exercise
- Pull up any stock chart with RSI indicator
- Find a time when RSI went below 30
- What happened to the price after?
- Find a time when RSI went above 70
- What happened to the price after?
Key Takeaways
- RSI measures momentum on a scale of 0-100
- Above 70 = overbought, Below 30 = oversold
- RSI is a warning sign, not a guaranteed signal
- Use RSI with other indicators, not alone
- Strong trends can stay overbought/oversold for extended periods
Part of the Top the Bot™ Education Series topthebot.com/learn