The momentum oscillator used by millions — how to read overbought/oversold signals, spot divergence, and filter false breakouts.
The Relative Strength Index (RSI) is a momentum oscillator developed by J. Welles Wilder Jr. in 1978. It measures the speed and magnitude of recent price changes and plots them on a scale from 0 to 100.
In plain English: RSI compares how strongly a stock has been rising versus how strongly it has been falling over the past 14 trading days. A reading near 100 means almost every session was a gain; near 0 means almost every session was a loss. RSI lives in a subplot below the price chart.
The RSI scale runs from 0 to 100. The most important reference levels are 70 (overbought), 50 (neutral), and 30 (oversold).
The stock has gained significantly over the past 14 periods. Momentum may be stretched. Not an automatic sell — in strong uptrends, stocks can stay overbought for weeks. But it raises caution about chasing new entries.
The stock has declined sharply over the past 14 periods. Selling may be exhausted. Not an automatic buy — in strong downtrends, stocks can stay oversold for a long time. A bounce is possible but not guaranteed.
The 50 level is underused by beginners but watched closely by professionals. It acts as the RSI's "equilibrium" — the dividing line between bullish and bearish momentum.
Bullish momentum is dominant. Buyers are generally winning each period. Uptrend is likely intact.
Momentum is shifting from bearish to bullish. A potential trend change or resumption of an uptrend.
Bearish momentum is dominant. Sellers are generally winning each period. Downtrend is likely intact.
Momentum is shifting from bullish to bearish. A potential trend change or beginning of a downtrend.
Divergence occurs when the RSI and the price chart are moving in opposite directions. This is RSI's most powerful and reliable signal — it suggests the current trend is losing momentum even before price confirms it.
Price makes a new low but RSI makes a higher low. Sellers are losing strength even as price falls. This often precedes a bullish reversal — look for a confirming candlestick pattern or volume spike.
Price makes a new high but RSI makes a lower high. Buyers are losing strength even as price rises. This often precedes a bearish reversal — be cautious about chasing new highs when RSI diverges negatively.
Divergence is a warning signal, not a guaranteed reversal trigger. Price can continue in the original direction for some time after divergence appears. Always wait for additional confirmation — a candlestick reversal pattern, volume spike, or MACD crossover (covered in the next lesson) — before acting on divergence alone.
In a powerful bull run, RSI can stay above 70 for months. Selling just because RSI is 'overbought' in a bull market is one of the most costly beginner mistakes.
RSI is calculated from past prices, so it always reflects what already happened. By the time RSI signals a reversal, price may have already moved significantly.
Many traders adjust the lookback period. A shorter RSI (e.g., 7) is more sensitive and fires more signals (more noise). A longer RSI (e.g., 21) is smoother but slower.
RSI's overbought/oversold signals are most reliable when the stock is trading in a range, not in a strong directional trend. Adjust your interpretation based on the broader market environment.
What does an RSI reading above 70 typically indicate?
A stock makes a new 52-week low, but its 14-day RSI is higher than it was at the previous low. What is this called and what does it suggest?
During a powerful bull market, a stock's RSI has stayed above 70 for three months without a meaningful pullback. What does this most likely mean?
Open any stock on BriMindInvest and look for RSI readings above 70 or below 30. Try checking SPY's RSI during recent market pullbacks to see historical oversold readings.