Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a momentum oscillator that scores recent price strength on a scale of 0 to 100. It compares the size of a stock's up moves against its down moves over a set period, usually 14 days, to gauge whether buyers or sellers have been in control. Because it is bounded, RSI makes it easy to see when a move has stretched to an extreme rather than just reading raw price.

Traders read RSI in a few main ways:

• Overbought and oversold: readings above 70 flag an overbought stretch where a pullback becomes more likely, and below 30 an oversold one where a bounce may be due. In a strong trend these extremes can persist, so treat them as warnings, not triggers.
• The 50 line: RSI holding above 50 says momentum is broadly bullish, while staying below 50 leans bearish, a quick read on who is in control.
• Divergence: when price makes a new high but RSI makes a lower high (or the reverse), momentum is fading beneath the surface, often an early warning of a reversal.
• Confirmation: like any single indicator, RSI works best alongside trend and volume. Selling just because RSI hit 70 in a strong uptrend is a classic mistake.

Suppose a stock rallies sharply and its 14-day RSI climbs to 78, deep in overbought territory. A momentum trader does not short it outright; they watch for RSI to roll back below 70 while price stalls, which together hint the surge is cooling. If instead price keeps climbing and RSI holds near 75, the uptrend is simply strong, a reminder that an extreme reading alone settles nothing.