Learn -- lesson 4 of 10
RSI, in plain language
What you'll learn: what RSI actually measures (momentum, not price), how to read the 70/30 zones, and why they are not automatic buy/sell signals.
RSI (Relative Strength Index) measures how fast and how far price has moved recently -- think of it as a speedometer for momentum, not a compass for direction. It is calculated from the size of recent up-moves versus down-moves and expressed on a scale from 0 to 100.
A high reading (commonly above 70) means price has been rising quickly and strongly -- the move has been fast, which traders call "overbought". A low reading (commonly below 30) means price has been falling quickly and strongly -- "oversold". Readings roughly between 30 and 70 describe a market where momentum is neither exhausted nor overheated.
The most important thing to understand about RSI is what it does not say: it says nothing about where price will go next, only how hard it has been moving. A market can stay overbought for weeks during a strong uptrend, and stay oversold for weeks during a strong downtrend -- momentum running hot is not the same as a reversal being due.
How to read it
- Above 70: momentum has been fast on the upside -- it can still continue, it does not have to reverse.
- Below 30: momentum has been fast on the downside -- same caveat in reverse.
- Roughly 30 to 70: momentum is neutral, neither exhausted nor overheated.
- RSI is most useful compared against the broader trend, not read by itself in isolation.
Common beginner mistakes
- Selling the moment RSI crosses above 70. In a strong uptrend, RSI can stay overbought for a long stretch while price keeps climbing.
- Buying the moment RSI crosses below 30, for the same reason in reverse during strong downtrends.
- Treating RSI as a price target. It measures speed of movement, not how far price will travel.