RSI: Overbought & Oversold
The most popular momentum oscillator, what its 30/70 levels mean, and how it misleads in trends.
RSI (Relative Strength Index)A 0–100 momentum gauge of overbought/oversold conditions. is the most popular momentumBuying recent winners and avoiding recent losers. oscillator. It boils recent up-moves vs down-moves into a single number from 0 to 100, giving a quick read on whether buyers or sellers have been dominating lately — and whether they may be overextended.
- Above 70 — traditionally “overboughtA condition suggesting price has risen too far, too fast.”: price has risen far and fast; buyers may be exhausted.
- Below 30 — traditionally “oversoldA condition suggesting price has fallen too far, too fast.”: price has fallen far and fast; sellers may be exhausted.
- Around 50 — neutral; the midline also acts as a rough bull/bear divider in trends.
The crucial nuance most beginners miss: “overboughtA condition suggesting price has risen too far, too fast.” does NOT mean “sell,” and “oversoldA condition suggesting price has fallen too far, too fast.” does NOT mean “buy.” RSI measures how stretched a move is, not whether it’s about to reverse. In a ranging market the 30/70 levels work beautifully as turn signals — but in a *strong trendThe prevailing direction of price: up, down or sideways.*, RSI can sit pinned above 70 (or below 30) for weeks while price marches on. Read overboughtA condition suggesting price has risen too far, too fast./oversoldA condition suggesting price has fallen too far, too fast. as “this move is extended,” a caution flag, not a trade trigger. (The pitfall lesson drives this home.)
ExampleIn a quiet range, a stock hits RSI 75 and pulls back, hits RSI 28 and bounces — clean signals. But during a powerful breakoutWhen price decisively pushes through a support or resistance level., RSI jumps to 80 and stays there for a month as price keeps climbing. ShortingSelling borrowed shares hoping to buy them back cheaper. that “overboughtA condition suggesting price has risen too far, too fast.” reading would have been painful.
Key takeawayRSI (0–100) gauges momentumBuying recent winners and avoiding recent losers.: >70 overboughtA condition suggesting price has risen too far, too fast. (stretched up), <30 oversoldA condition suggesting price has fallen too far, too fast. (stretched down), ~50 neutral. These work as turn signals in ranges but can stay pinned in strong trends — they flag “extended,” not “reverse now.”
FAQs
What RSI period should I use?
The default is 14 periods, which suits most uses. Shorter periods (e.g. 7) make RSI more sensitive and reactive (more signals, more noise); longer periods (e.g. 21) smooth it out. Start with 14 and adjust only if it doesn’t fit your timeframe and style.