What does RSI measure?

RSI (Relative Strength Index) measures the speed and magnitude of recent price changes on a scale of 0–100. The default period is 14 days. It tells you how fast a stock has moved recently relative to its own history — not how it compares to a benchmark like the S&P 500 (that's RS Rating, a different tool). Readings above 70 are traditionally called overbought; below 30 are oversold.

Does overbought RSI mean I should sell?

Not necessarily, and this is a common beginner mistake. In strong trending stocks, RSI can stay above 70 for weeks or months. Many of the best momentum stocks spend extended periods in 'overbought' territory. Using RSI to fade strong uptrends — selling because RSI is overbought — consistently underperforms. Overbought signals are more useful as warnings in mature uptrends or at major resistance, not as standalone sell signals in strong momentum environments.

What is an RSI divergence and why does it matter?

An RSI divergence occurs when price and RSI move in opposite directions. A bearish divergence: price makes a new high but RSI makes a lower high — the rally is losing internal momentum. A bullish divergence: price makes a new low but RSI makes a higher low — selling pressure is fading. Divergences are most reliable when combined with other signals (resistance levels, volume patterns) rather than used alone.

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July 2, 2025·7 min read·By Trading Awareness

RSI Indicator Explained: How Momentum Traders Use It

The Relative Strength Index (RSI) measures how fast a stock has moved, not how much. Learn how momentum traders interpret overbought/oversold readings, spot divergences, and use RSI to time entries and exits.

The Relative Strength Index — usually called RSI — is one of the most widely used momentum oscillators in technical analysis. Created by J. Welles Wilder and introduced in his 1978 book New Concepts in Technical Trading Systems, it measures the speed and magnitude of recent price changes to assess whether a stock is overbought or oversold relative to its own recent history.

Note: RSI the oscillator is completely separate from RS Rating (Relative Strength vs a benchmark). They measure different things. RSI tells you how fast a stock has moved internally; RS Rating tells you how that stock has performed versus the S&P 500.

How RSI is calculated

The default RSI period is 14 days. The calculation compares average gains to average losses over those 14 periods:

RSI = 100 − [100 ÷ (1 + Average Gain ÷ Average Loss)]

The result is a number between 0 and 100. A stock that has closed higher every day for 14 days would have an RSI near 100; a stock that has closed lower every day would be near 0. In practice, most readings fall between 30 and 70.

Overbought and oversold zones

Wilder defined the standard zones as:

RSI above 70 — overbought. The stock has moved up rapidly relative to recent history. This doesn't mean it will reverse immediately, but the momentum has become stretched.
RSI below 30 — oversold. The stock has fallen rapidly and may be due for a relief bounce.

A critical nuance: overbought doesn't mean sell, and oversold doesn't mean buy. In strong trending stocks, RSI can stay above 70 for weeks or months. Many of the best momentum stocks spend extended periods in "overbought" territory — that's what strong momentum looks like. Using RSI as a contrarian fade signal in a strong uptrend is one of the most common mistakes beginners make.

How momentum traders actually use RSI

Rather than fading overbought readings, experienced momentum traders use RSI differently:

Trend confirmation: RSI consistently above 50 in an uptrend confirms momentum is healthy. If RSI keeps stalling below 50 as the stock tries to rally, the uptrend may be weakening.
Pullback entries: In a strong uptrend, RSI pulling back to the 40–50 zone (without going oversold) is often the best entry point — the stock has digested its gains without breaking down.
Failure swings: Wilder's most powerful RSI signal: RSI makes a lower high while price makes a new high (bearish failure swing), or RSI makes a higher low while price makes a new low (bullish failure swing). These divergences often precede reversals.

RSI divergences

An RSI divergence occurs when RSI and price move in opposite directions:

Bearish divergence: Price makes a new high, but RSI makes a lower high. The rally is losing momentum internally. Often precedes a reversal or correction.
Bullish divergence: Price makes a new low, but RSI makes a higher low. Selling pressure is fading. Often precedes a recovery.

Divergences work best when combined with other signals — a bearish RSI divergence at a major resistance level with declining volume is far more meaningful than a divergence in the middle of a range.

Sources & References