What Is Relative Strength Index?
The Relative Strength Index (RSI) is a momentum indicator measuring the speed and magnitude of price changes. Learn how to read RSI and identify overbought/oversold conditions.
Definition
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes on a scale from 0 to 100. Developed by J. Welles Wilder Jr. in 1978, it helps traders identify whether a stock is overbought (potentially due for a pullback) or oversold (potentially due for a bounce).
The standard interpretation is that an RSI above 70 indicates the stock is overbought and may be due for a correction, while an RSI below 30 indicates it is oversold and may be due for a recovery. The default calculation period is 14 days. However, strong trending stocks can remain overbought or oversold for extended periods, so RSI should not be used as a standalone buy/sell signal.
RSI divergence is one of the most powerful signals: when the stock price makes a new high but RSI makes a lower high, it suggests momentum is fading and a reversal may be coming. The reverse (price makes a new low, RSI makes a higher low) suggests selling pressure is easing.
Real-World Example
A stock has rallied 40% in two months and its RSI is 82 -- deep in overbought territory. This does not mean you should sell immediately, but it is a warning that the rally may be overextended. A few days later, the stock pulls back 8% and RSI drops to 55, a more neutral reading. Conversely, a stock that has fallen 30% with an RSI of 22 is deeply oversold. While it could keep falling, the extreme reading suggests sellers may be exhausted.
Why It Matters
RSI gives traders a quick read on whether a stock's recent move has been too fast in either direction. It is one of the most widely used technical indicators and appears on every charting platform. Understanding RSI helps you avoid chasing stocks at the peak of a rally or panic-selling at the bottom of a decline. Combined with other indicators like moving averages and volume, RSI provides a more complete picture of market conditions.
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Frequently Asked Questions
What RSI level means a stock is overbought?
An RSI above 70 is traditionally considered overbought. However, strong trending stocks can sustain RSI above 70 for weeks. Overbought does not mean the stock will immediately fall -- it means momentum is elevated and caution is warranted.
Should I sell when RSI is above 70?
Not necessarily. RSI above 70 is a warning signal, not a sell order. In strong uptrends, RSI can stay elevated for extended periods. Use RSI in combination with other indicators, support/resistance levels, and your investment thesis.
What RSI period should I use?
The default 14-day period works well for most purposes. Shorter periods (7-9 days) are more sensitive and generate more signals (with more noise). Longer periods (21+ days) are smoother but slower to react.
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