Invest Glossary

Plain-English definitions, reviewed by an independent investor

RSI (Relative Strength Index)

RSI gauges recent momentum on a 0–100 scale to flag when a stock may be overbought or oversold.

RSI gauges recent momentum on a 0–100 scale to flag when a stock may be overbought or oversold.

RSI = 100 − 100 ÷ (1 + Average Gain ÷ Average Loss)

A quick example

RSI averages recent gains and losses over a window, typically 14 periods, and maps the ratio to a 0–100 scale. Above 70 is the conventional overbought line, below 30 oversold. A stock with RSI at 82 has risen sharply and is stretched, but in a powerful uptrend it can stay above 70 for weeks — selling just because RSI is high can leave you out of the biggest moves. RSI is best used as a condition-check alongside trend and volume, not as a standalone buy or sell signal.

How to apply it

Wait for confirmation: an RSI extreme is more meaningful when price also shows a reversal pattern or diverges from the indicator. Divergence — price making a new high while RSI makes a lower high — is a classic warning of weakening momentum.

What it means for you

It helps spot extremes where a reversal may be due.

Picture this

A stock rallies from $20 to $60, pushing its RSI to 88 — deeply overbought. A trader sells, expecting a pullback, and the stock keeps climbing to $80 as the RSI stays pinned above 70 for months. The trader was early and missed the final third of the move. The lesson appears constantly in strong trends: RSI extremes last longer than traders expect. The signal works better at market extremes with volume confirmation than in the middle of a powerful trend.

Common mix-ups

Strong trends can stay overbought for a long time; RSI alone is not a trigger.

Key takeaway

RSI flags momentum extremes on a 0–100 scale, with 70 the conventional overbought line and 30 oversold — but strong trends can stay extreme for weeks. Selling every time RSI crosses 70 will leave you out of the biggest moves, and buying every sub-30 reading can catch a falling knife. Use RSI as a condition check alongside trend and volume, and pay most attention to divergence, where price and momentum disagree. It confirms; it does not decide.

Definitions reviewed by the Investing Glossary editorial team.

Questions Investors Ask

What RSI is oversold?

Below 30 is the common oversold line; above 70 oversold’s opposite, overbought.

Use RSI alone?

Better with trend and volume; it confirms, it does not decide.

What is RSI divergence?

Price and RSI moving in opposite directions, hinting momentum is fading.

What window is standard?

14 periods is the default; shorter windows react faster but noisier.

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