The Relative Strength Index measures the magnitude of recent gains relative to recent losses on a 0–100 scale, typically over 14 periods. Readings above 70 are conventionally called overbought and below 30 oversold, but these mark strong momentum rather than turning points — in a strong trend RSI can stay above 70 for a long time. Divergence between RSI and price is generally the more useful signal.
The Relative Strength Index measures the magnitude of recent gains relative to recent losses, on a scale of 0 to 100. The default lookback is 14 periods.
Note what it does not measure: value, or how far price has travelled. RSI at 75 does not mean an instrument is expensive. It means the last fourteen periods have been dominated by up-closes.
That distinction is the source of nearly every RSI mistake.
What the numbers mean
“Overbought” is an unfortunate label. It sounds like a verdict — too high, due to fall — when the reading is a description of momentum. Strong momentum is what trends are made of.
The mistake the labels cause
In a strong uptrend, RSI can hold above 70 for many periods while price continues climbing. The reverse holds in downtrends: RSI can stay beneath 30 through the whole decline. Buying oversold readings in a downtrend is catching a falling knife with a number for justification.
The reconciliation is Part 4 again. In a range, RSI extremes are meaningful — price is oscillating between boundaries and momentum extremes coincide with them. In a trend, RSI extremes confirm strength rather than warning of reversal.
Divergence
The RSI signal worth more than either threshold.
Bearish divergence: price makes a higher high; RSI makes a lower high. The new peak was reached with less momentum than the previous one.
Bullish divergence: price makes a lower low; RSI makes a higher low. Sellers reached a new low with less conviction.
Divergence describes something real: a move continuing while the energy behind it diminishes. It connects to the structural warning in Part 7, and the two often appear together — divergence first, then a lower high, then a break of structure.
Two cautions. Divergence can persist, sometimes for a long time, before anything happens. It is a warning about condition, not a timing signal. And it is only meaningful at structurally significant points — divergence between two random intraday peaks is noise.
Key takeaway Use RSI to describe momentum, and let price structure decide entries. Divergence at a tested resistance level, alongside a lower high, is three independent things agreeing. Divergence alone is one thing, and it is the weakest of the three.
Settings and practice
14 periods is standard and the most widely watched, which — as with moving averages — is part of why it works. Shorten it for more signals and more noise; lengthen it for fewer and steadier. Change it for a reason, not to improve the appearance of past signals.
The 50 midline is underused. In an uptrend, RSI pullbacks that hold above 50 suggest the trend is intact; sustained moves below 50 suggest the character has changed. This is often a better trend filter than the 70/30 lines.
InnoMP’s Market Watcher supports RSI alerts for overbought, oversold and custom thresholds, combinable with price conditions. “Price at my level AND RSI below 40” is a far more selective alert than either alone — and selectivity is the whole point.
Next: MACD explained — the relationship between two moving averages, turned into a signal.
- RSI is bounded between 0 and 100 and is usually calculated over 14 periods.
- Above 70 is conventionally overbought; below 30 oversold.
- In a strong trend, RSI can remain overbought or oversold for extended periods without reversing.
- Divergence occurs when price makes a new extreme and RSI does not.