RSI — Relative Strength Index

Overbought, oversold, divergence — and the mistakes everyone makes.

TL;DR

RSI (Relative Strength Index) is a momentum oscillator that ranges 0–100. Readings above 70 are typically called overbought; below 30, oversold. RSI is most useful for divergence signals, not absolute thresholds.

How it's calculated

RSI = 100 − (100 ÷ (1 + RS)), where RS = average gain ÷ average loss over the lookback period (default: 14 candles). The math doesn't matter day-to-day — what matters is what the number tells you.

What the levels mean

Standard interpretation — but read with context.

→Above 70 — overbought; trend often continues but reversal odds rise
→Below 30 — oversold; same logic in reverse
→Around 50 — momentum neutral; often the midpoint in trending markets
→Above 80 / below 20 — extreme readings, more reliable mean-reversion signals

Divergence — the highest-quality RSI signal

When price makes a new high but RSI makes a lower high, that's bearish divergence — momentum is weakening even though price hasn't turned yet. Bullish divergence is the mirror: new low in price, higher low in RSI.

Worked example

Reading RSI on a Bitcoin chart

BTC rallied from $60K to $73K. RSI on the daily printed 85.

1Price$60K → $73K (+22%)
2RSI85 (extreme overbought)
3Next candleBTC tries to push higher but closes weaker; RSI ticks down to 78
4Day afterBTC drops 4% on no news; RSI falls to 65
5InterpretationClassic exhaustion — momentum peaked before price did

Takeaway

Extreme RSI readings (above 80 / below 20) and momentum divergence are far more useful signals than the standard 70/30 levels alone.

Common mistakes

What to avoid

!Selling every time RSI crosses 70 in a strong trend — RSI can stay elevated for weeks
!Using RSI in isolation without price action context
!Trading divergence too early — wait for actual price confirmation
!Applying the same 14-period setting across time frames without checking what works for the asset

Self-check

Test yourself

Q1What does an RSI of 25 generally indicate?+

Oversold conditions — momentum has been declining and a bounce becomes more likely.

Q2What is bearish RSI divergence?+

Price makes a higher high but RSI makes a lower high — momentum weakening before price turns.

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