Relative Strength Index (RSI)

What share of the strength comes from gains?

RSI compares the average gain and average loss over the last 14 bars: the bigger the share of gains, the closer the reading gets to 100. Above 70 is overbought, below 30 is oversold.

Overbought ≠ about to fall

In a strong trend, RSI can stay above 70 for dozens of bars in a row. Treating "overbought" mechanically as a sell signal often gets you run over by the trend.

Wait for it to leave the zone before acting

Shorting the moment RSI hits 70 often means selling halfway up the mountain. A steadier approach is to wait for it to fall back below 70, or climb back above 30, before treating it as a signal. That's only an edge in probability; false signals still happen.

Key takeaways

• RSI measures the share of upward force over a recent period. The usual setting is 14 candles, with > 70 seen as overbought and < 30 as oversold.
• Overbought only means it has risen a lot and fallen little lately, not that it will fall right away. In a strong trend, RSI can stay above 70 for a long time.
• RSI above 50 means average gains exceed average losses, so buyers have the edge; below 50, sellers do.
• "Wait for it to leave the overbought/oversold zone, then fade it" is steadier than "fade it as soon as it enters", but in a trending market both often fail.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. Click "Example: find the bar where RSI ≈ 82": is this reading overbought, oversold or neutral? Look at the tug-of-war bar below to see what share the buying strength has.
2. Switch to "Strong trend" and press ▶: how many bars did RSI stay above 70? What's the success rate of the sell signals?
3. Switch back to "Choppy" and look again with the same rules: how is the success rate different?
4. Change the period from 14 to 7: RSI gets more sensitive. How does the "Time in overbought" share change?

Quiz and explanations

1. RSI = 82 is usually described as…

Answer: Overbought.Above 70 is the overbought zone.

2. In a strong rally, RSI stays above 70 for several days. What's the most sensible reading?

Answer: The trend is strong, and overbought can persist.Overbought ≠ about to fall. In a strong trend, RSI can stay "overbought" for a long time.

3. Over the last 14 candles, the average gain exactly equals the average loss. Roughly what's the RSI?

Answer: 50.Upward and downward force each make up half, so the reading is 50.

Terms in this lesson

• false signal (False Signal): An indicator gives a signal, but price doesn't move the way it suggested.
• overbought (Overbought): An indicator reading near the top, meaning price has risen a lot recently, though it won't necessarily fall right away.
• oversold (Oversold): An indicator reading near the bottom, meaning price has fallen a lot recently, though it won't necessarily bounce right away.
• RSI (Relative Strength Index): A 0–100 indicator comparing average gains with average losses over a period; above 70 is overbought, below 30 oversold.