The Relative Strength Index (RSI) is a momentum oscillator that moves between 0 and 100. It compares the size of recent gains to recent losses, giving a reading of how strong or stretched a move is. Readings above 70 are called overbought and below 30 oversold.
The overbought trap
The biggest beginner mistake is shorting simply because RSI is overbought. In a strong uptrend RSI can stay above 70 for a long time while price keeps rising. Overbought does not mean 'sell' — it means momentum is strong. Fighting that with a fixed rule is a fast way to lose.
Using RSI with the trend
A more robust use is to trade RSI in the direction of the trend. In an established uptrend, wait for RSI to dip toward oversold on a pullback and then turn back up as price resumes — that is a lower-risk long entry, with a stop below the pullback low. The oscillator times the entry; the trend gives you the direction.
- RSI above 70 = strong momentum, not an automatic sell.
- RSI below 30 = weak momentum, not an automatic buy.
- In uptrends, buy pullbacks as RSI turns up from lower readings.
- The 50 level often acts as a rough bull/bear midline.
RSI measures momentum, not destiny — overbought can stay overbought, so use it with the trend rather than against it.
Like all indicators, RSI is derived from price and works best as a filter or timing aid, not a standalone signal. Its most powerful use — divergence — gets its own module next.