RSI indicator, explained: how to read Relative Strength Index

What is the RSI indicator?

RSI, short for Relative Strength Index, is one of the most widely used momentum indicators in technical analysis. It condenses recent price action into a single number between 0 and 100 that rises when recent gains dominate and falls when recent losses dominate. In short, it tries to answer one question: how strong is the current move, and is it speeding up or running out of steam?

How is RSI calculated?

You don't need to compute it by hand, but the logic is worth knowing. RSI compares the average size of recent up-moves to the average size of recent down-moves over a chosen lookback period — most commonly 14 candles. If up-moves dominate, RSI climbs toward 100; if down-moves dominate, it falls toward 0; if they're balanced, it hovers near 50. That midpoint of 50 is itself useful: staying above it suggests up-momentum has the upper hand, below it suggests the opposite.

What do "overbought" and "oversold" really mean?

This is where most people go wrong. The classic levels are 70 (overbought) and 30 (oversold). But overbought does not mean "sell now," and oversold does not mean "buy now." A reading above 70 simply means momentum has been strongly positive — and in a powerful trend, RSI can sit above 70 for a long time while price keeps rising. Treating every overbought reading as a reversal signal is one of the fastest ways to fight a strong trend. The levels flag strong momentum; they do not predict a turn on their own.

What is RSI divergence?

The more respected use of RSI is divergence — when price and RSI disagree. If price makes a higher high but RSI makes a lower high, momentum is fading even as price rises; that's bearish divergence. The reverse — price making a lower low while RSI makes a higher low — is bullish divergence. Divergences hint that a move is losing steam, but they are warnings, not guarantees: a divergence can persist while price continues, so it needs confirmation before it means anything actionable.

Using RSI sensibly

Because RSI measures only momentum, it works best as one input among several rather than a complete system. A common, sensible pairing is to read direction from a trend tool (see SuperTrend explained) and use RSI to judge whether momentum supports that direction — then require a separate trigger before acting. That is how RSI is used as the momentum gauge in the framework behind The Art of Option Buying. On its own, no single indicator is a complete method.

RSI tells you how strong a move is, not when it will end. Reading "overbought" as "sell" is fighting the very momentum the indicator is showing you.

A note on settings

The default 14-period RSI is a starting point, not a rule. A shorter period makes RSI jumpier and more sensitive; a longer one smooths it but lags. As with any indicator, tuning the settings until they fit past data perfectly tends to produce something that behaves differently going forward — so favour robust, common settings over over-optimised ones.