The RSI measures the speed and size of recent price moves on a scale of 0 to 100. The standard 14-period setting compares average gains to average losses over the last 14 candles. Readings above 70 are called overbought and below 30 oversold, but those words are more slippery than they sound.
What it measures
RSI is a momentum gauge, not a reversal signal. A high reading means price has risen quickly relative to its recent history - which in a strong uptrend is exactly what you would expect, and price can stay overbought for a long time. The genuinely useful signal is divergence: price makes a new high but RSI makes a lower high, hinting the momentum behind the move is fading.
How to read it
Where traders get it wrong
The fatal mistake is treating overbought as a sell signal and oversold as a buy signal. In a strong trend, RSI can sit above 70 for weeks while price keeps climbing, and every counter-trend trade loses. Use overbought and oversold only in ranging markets, use divergence with a level for reversals, and never fight a clear trend because an oscillator says stretched.
An indicator confirms, it does not command. The signal is a reason to look, not an order to trade. Combine it with levels and the trend, and size every trade with the position size calculator so a false signal costs a small, fixed amount.
Test it before you trust it
Every indicator lags, because it is built from prices that have already printed. Add it to the chart in the simulator, trade the same setup with and without it across a large sample, and keep it only if it genuinely raises your expectancy - not because the signal looks convincing in hindsight.
RSI FAQ
What does RSI measure?
RSI, the Relative Strength Index, measures the speed and magnitude of recent price changes on a 0-100 scale. The standard 14-period version compares average gains to average losses over the last 14 candles. It is a momentum indicator - it tells you how stretched a move is, not which direction price will go next.
What are good RSI overbought and oversold levels?
The default levels are 70 for overbought and 30 for oversold, and some traders use 80 and 20 in strong trends to reduce false signals. But these are not automatic buy or sell triggers - in a trending market price can stay overbought or oversold for a long time. They work best in ranging conditions.
What is RSI divergence?
RSI divergence is when price and the RSI move in opposite directions - for example, price makes a higher high but RSI makes a lower high. It suggests the momentum behind the move is weakening and a reversal may be near. Divergence at a key level is one of the more reliable ways to use RSI, but it still needs confirmation.