What is RSI?
Learn how the Relative Strength Index helps you spot when stocks are overbought or oversold.
Quick Answer
RSI (Relative Strength Index) is a momentum indicator that measures if a stock is overbought or oversold. It ranges from 0 to 100. Above 70 = potentially overbought (might drop soon). Below 30 = potentially oversold (might bounce). Think of it like a speedometer for stocks—RSI tells you if momentum is too hot or too cold.
How to Read RSI
RSI Below 30
Oversold - Stock has fallen too fast, might bounce back. Potential buying opportunity.
RSI 30-70
Neutral - Stock is in normal range. No extreme signals.
RSI Above 70
Overbought - Stock has risen too fast, might pull back. Potential selling signal.
Real Trading Examples
✓ Oversold Bounce Example
Tesla (TSLA)
Stock drops from $250 to $200 in 2 weeks
RSI falls to 25 (oversold!)
↓
Signal: Potential buy - stock sold off too hard
↓
Stock bounces back to $220 over next week
✓ 10% gain from the oversold level
Overbought Reversal Example
GameStop (GME) - 2021 Meme Stock
Stock rockets from $20 to $400 in weeks
RSI hits 95 (extremely overbought!)
↓
Signal: Danger - unsustainable rally
↓
Stock crashes to $40 within weeks
90% drop from the overbought peak
How Traders Use RSI
1. Buy When Oversold (RSI < 30)
When RSI drops below 30, it suggests selling pressure is exhausted. Buyers often step in.
Best in uptrends - buying dips
Risky in downtrends - "catching a falling knife"
2. Sell When Overbought (RSI > 70)
When RSI rises above 70, it suggests buying pressure is exhausted. Sellers may take over.
Good for taking profits on winners
Strong stocks can stay overbought for weeks (don't fight trends!)
3. Divergence (Advanced Signal)
When price makes new highs but RSI doesn't = bearish divergence (reversal coming).
Example: Stock: $100 → $110 → $115, but RSI: 75 → 72 → 68
Warning: Price rising but momentum weakening = potential top
4. Confirm Breakouts
Stock breaks resistance + RSI above 60 = strong breakout with momentum.
RSI rising with price = real breakout
RSI falling while price rises = weak breakout (likely fails)
RSI Mistakes to Avoid
Trading RSI Alone
RSI is a tool, not a crystal ball. Always confirm with price action, support/resistance, and volume. RSI = 25 doesn't guarantee a bounce—stock could keep falling.
Fighting Strong Trends
In strong uptrends, RSI can stay above 70 for weeks. Selling just because "it's overbought" makes you miss huge gains. In downtrends, RSI can stay below 30 for weeks—don't catch falling knives!
Using Wrong Timeframe
Day traders use 14-period RSI on 5-min charts. Swing traders use daily charts. Using 5-min RSI for long-term investing = noise and bad decisions.
Ignoring the Bigger Picture
RSI might say "oversold" but if company just announced bankruptcy, fundamentals matter more! Always check WHY the stock is moving, not just what RSI says.
RSI Quick Reference
| RSI Level | Condition | Typical Action |
|---|---|---|
| 0-30 | Oversold | Consider buying (if trend is up) |
| 30-40 | Weak | Cautious - still bearish momentum |
| 40-60 | Neutral | No clear signal - wait |
| 60-70 | Strong | Bullish momentum building |
| 70-100 | Overbought | Consider selling/taking profits |
Common Questions
What's the best RSI period setting?
The standard is 14 periods (14 days for daily charts, 14 hours for hourly, etc.). Day traders might use 9-period for faster signals. Long-term investors use 21 or 25 for smoother readings.
Can RSI predict the future?
No indicator predicts the future. RSI shows current momentum and potential exhaustion. It's a probability tool—oversold stocks bounce more often than not, but not always.
Should I wait for RSI to cross back above 30 before buying?
Many traders do. Buying when RSI crosses back above 30 (from below) confirms momentum is shifting. Buying at RSI = 25 might mean catching a falling knife—it could drop to RSI = 15!
Does RSI work for all stocks?
RSI works best on liquid, volatile stocks that oscillate (tech stocks, growth stocks). Less useful on stable dividend stocks that barely move (utilities, REITs).
Key Takeaways
- •RSI measures momentum on a scale of 0-100
- •Below 30 = oversold (potential buy), Above 70 = overbought (potential sell)
- •RSI works best when combined with trend analysis and volume
- •Strong trends can keep RSI overbought/oversold for extended periods
- •Never trade on RSI signals alone—confirm with other indicators