How to Read RSI: What Overbought and Oversold Really Mean

RSI is often a beginner's first indicator and also one of the most misunderstood. Shorting simply because it reads 70 can cause losses. This guide explains how to interpret it.

What is RSI?

The Relative Strength Index expresses recent gains relative to recent losses on a 0–100 scale. The default is 14 periods. It describes momentum: how quickly and strongly price has moved.

What do 70 and 30 mean?

• 70 or above: Overbought, suggesting short-term overheating and a possible correction.
• 30 or below: Oversold, suggesting depressed short-term conditions and a possible rebound.

In a strong trend, RSI can remain above 70 while price keeps rising, or below 30 while it keeps falling. “70 always means short” is dangerous.

A useful application: Divergence

A central use of RSI is divergence, when price and the indicator disagree.

• Bearish divergence: Price makes higher highs while RSI makes lower highs, suggesting weakening upward momentum and warning of a possible decline.
• Bullish divergence: Price makes lower lows while RSI makes higher lows, suggesting weakening downward momentum and a possible rebound.

Practical tips

• Combine RSI with trend, support and resistance instead of entering from RSI alone.
• The guide gives greater weight to RSI on longer timeframes, such as four-hour and daily charts.
• First assess trend direction with moving averages, then use RSI as supporting timing evidence.