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Relative Strength Index (RSI)
Overbought and oversold on a 0-100 scale, and why trend context should override the raw reading.
RSI is an oscillator, scaled 0 to 100, that measures current price relative to its own recent average. Traders use it to gauge overbought and oversold conditions.
Reading the scale
A reading of 30 or below is considered oversold, signaling potential buy interest. A reading of 70 or above is considered overbought, signaling potential sell interest. The lookback period is configurable, a 14-day period is common, and shorter periods react faster but produce noisier signals.
Trend can override the RSI signal
RSI can hit overbought territory above 70 while price continues rising for an extended stretch, shorting purely because RSI reads "overbought" can mean fighting a strong trend and losing. In a strong uptrend, buying dips typically outperforms shorting tops on RSI alone. When RSI conflicts with the prevailing trend or other confirmation, trend context should take precedence.
Not a standalone signal
RSI is not a guaranteed, standalone entry trigger. Its real value comes from combining it with trend direction and other confirmation.
Related concepts
RSI works best combined with trend and moving-average context rather than used alone, this is the concrete mechanism behind the "trend overrides RSI" lesson above. RSI extremes are also a common input for traders hunting reversal setups, with the same against-the-trend risk applying there too.
Key takeaways
- RSI measures overbought (≥70) and oversold (≤30) conditions on a 0–100 scale.
- Shorter RSI periods react faster but are noisier.
- A strong trend can keep RSI overbought or oversold for an extended period, trend context should take precedence over the raw RSI reading.
- Combine RSI with trend and other confirmation rather than trading it as a standalone signal.