RSI (Relative Strength Index) is a momentum oscillator mapping the ratio of recent average gains to average losses onto a 0–100 scale, over a lookback window — 14 bars by default. High readings mean recent gains dominated; low readings mean losses dominated.
How it works
The 70/30 bands flag statistically stretched readings relative to the recent window. They describe intensity — not direction, and not timing.
In strong trends, RSI can stay above 70 or below 30 for extended periods (“overbought can stay overbought”). The reading is most reliable in ranges at the edges, and as a pullback-timing filter aligned with the prevailing trend.
Why it matters
RSI is a lagging-family momentum description — useful inside a rule, misleading when read as a reversal forecast.
The setting changes the reading: the same market shows different RSI values at 7, 14, and 21 bars. Every reading is “RSI(14) says…”
A simple market example
In a steady uptrend, RSI(14) holds between 65 and 80 for six weeks. A trader selling every overbought reading sells the strongest parts of the trend three times. A trader using RSI’s dips to the 40–50 zone timed two pullback entries with the trend.
Common mistakes
Selling because “it is overbought.” Overbought describes one-sided momentum — the standard condition of a strong trend, not a coming fall.
Treating a divergence as a trade trigger. Divergence weakens the trend’s claim; it can stack several times before anything happens.
Frequently asked questions
Why does RSI stay overbought in a trend?
Because it measures one-sided momentum, and a strong trend is exactly that. The reading will normalize when the trend does — not before.
Does changing RSI’s period fix the problem?
No. Shorter periods react faster and false-fire more; longer ones lag more. The core misuse — reading momentum as reversal — survives every setting.
What is an RSI divergence?
Price prints a new extreme while RSI does not. It means momentum is fading relative to price — an observation to log and weigh, not a standalone signal.
Educational content only. Definitions describe common market usage and may vary by jurisdiction, instrument, or institution.