The RSI Indicator: How to Spot Overbought and Oversold Stocks
The Relative Strength Index condenses a stock's recent momentum into a single number between 0 and 100. Here's how to read it correctly.
What the RSI is trying to measure
The Relative Strength Index, or RSI, is a momentum indicator that compares the size of a stock's recent gains to the size of its recent losses over a set period, usually 14 days, and condenses that comparison into a single number between 0 and 100. The underlying idea is to gauge whether a stock's recent price move has been unusually fast or extended relative to its own recent history.
Reading the scale
A high RSI reading, traditionally above 70, suggests a stock has risen quickly and by a large amount relative to its recent losses — described as "overbought." A low RSI reading, traditionally below 30, suggests the opposite: a stock has fallen quickly relative to its recent gains, described as "oversold." A reading near 50 suggests recent gains and losses have been roughly balanced.
- An RSI above 70 doesn't mean a stock will definitely fall — it means recent upward momentum has been unusually strong by this specific measure.
- An RSI below 30 doesn't mean a stock will definitely rise — it means recent downward momentum has been unusually strong.
- The 70/30 thresholds are conventions, not fixed rules; some traders use 80/20 for a stricter definition, especially in more volatile markets.
The most common misreading of the indicator
The single most common mistake with the RSI is treating an overbought or oversold reading as an automatic buy or sell signal. During a genuinely strong trend, a stock's RSI can remain above 70 for weeks, continuing to climb the entire time — an investor who sold the moment it crossed 70 would have exited a strong trend far too early. The RSI measures momentum, not an absolute ceiling or floor on price.
An overbought reading means a stock has been running hot lately. It doesn't come with an expiration date attached.
How it's more often used well
Rather than trading the raw 70/30 crossovers directly, many technical analysts use the RSI to spot "divergence" — situations where a stock's price makes a new high, but the RSI fails to make a corresponding new high, suggesting the upward momentum behind the move may be weakening even though price hasn't turned yet. This is generally treated as a more reliable signal than the basic overbought/oversold threshold alone, though still not a guarantee.
Using it alongside other tools
Like most single indicators, the RSI tends to be more useful in combination with other analysis — trend direction, support and resistance levels, volume — than relied on entirely by itself. An overbought reading during an established uptrend is read very differently than the same reading during a choppy, directionless market, which is a judgment call the indicator alone can't make for you.
This article is educational and general in nature. It isn’t personalized investment, tax, or legal advice — always weigh your own circumstances, or talk to a licensed professional, before making financial decisions.