RSI Indicator Guide: Overbought and Oversold Signals
The Relative Strength Index measures momentum on a 0–100 scale. Learn the RSI formula, the 70/30 levels, and how to avoid false overbought signals.
RSI Indicator Guide: Overbought and Oversold Signals
RSI is the most used momentum oscillator in the world. Used right, it tells you when a move has gone too far, too fast.
The Relative Strength Index (RSI), created by J. Welles Wilder in 1978, measures the speed and magnitude of recent price changes on a scale from 0 to 100. It is the default momentum tool on almost every charting platform.
The RSI formula
RS = Average Gain / Average Loss (over N periods, usually 14)
RSI = 100 − [100 / (1 + RS)]
- If average gain rises and average loss falls, RS grows and RSI climbs toward 100
- If average loss rises and average gain falls, RS shrinks and RSI drops toward 0
- When gains and losses are equal, RS = 1 and RSI = 50
Worked example — average gain = 1.2, average loss = 0.8 over 14 periods:
RS = 1.2 / 0.8 = 1.5
RSI = 100 − [100 / (1 + 1.5)] = 100 − 40 = 60
The standard levels
| Level | Meaning | Default action |
|---|---|---|
| Above 70 | Overbought | Look for exhaustion / reversal |
| Below 30 | Oversold | Look for a bounce |
| Around 50 | Neutral | No edge — stand aside |
Important: "overbought" does not mean "sell immediately." In a strong uptrend, RSI can stay above 70 for weeks. Use the level as a flag, not a trigger.
The 50 line
The 50 level is a quiet but powerful trend filter:
- RSI > 50 — bulls in control; bias longs
- RSI < 50 — bears in control; bias shorts
- Cross of 50 — momentum shifting; watch for confirmation
How to use RSI
- Confirm trend — price above a rising MA and RSI above 50 = bullish alignment
- Fade extremes in ranges — sell 70, buy 30, exit at 50
- Spot divergence — see our RSI divergence guide
- Avoid trading extremes in strong trends — overbought can stay overbought
Common mistakes
- Selling at 70 / buying at 30 blindly — the biggest RSI mistake of all
- Using RSI alone — pair it with a trend indicator (MA, ADX)
- Wrong timeframe — RSI on a 1-minute chart is mostly noise; use 15m+
RSI settings
- 14 period — Wilder's original; the default on every platform
- 9 period — faster, more signals, more noise (day traders)
- 21 period — slower, smoother (swing traders)
How to start
- Add the 14 RSI to a daily or 4-hour chart
- Mark the 50 line as a trend filter
- Only fade 70 / 30 when price is in a clear range
- Always pair entries with a stop — use the stop loss calculator
Summary
RSI tells you when momentum is stretched. Pair it with a trend filter, respect the 50 line, and never auto-sell at 70. Done right, it's one of the most reliable momentum tools a beginner can use.