• RSI (relative strength index) — momentum oscillator scaled 0 to 100.
  • Standard lookback period is 14 bars.
  • Above 70 is conventionally read as overbought, below 30 as oversold.
  • Divergence between RSI and price is often used as a reversal hint.

RSI compares the magnitude of recent gains to recent losses, scaled into a 0–100 range. In practice, it’s most useful for spotting when price has moved a lot in a short window, not for predicting the next direction.

How to read RSI

The two common signals are:

  • Overbought (above 70) — recent gains dominate. In strong trends, RSI can stay above 70 for extended periods, so “overbought” is not automatically “sell”.
  • Oversold (below 30) — recent losses dominate. Same caveat applies in reverse.

By contrast with simple price-based signals, RSI is statistical — it tells you about momentum, not value.

Divergence

RSI divergence is one of the more useful signals:

  • Bearish divergence — price makes a higher high while RSI makes a lower high. Often used to anticipate a top.
  • Bullish divergence — price makes a lower low while RSI makes a higher low. Often used to anticipate a bottom.

That said, divergence can persist for many bars before the reversal happens, if it happens at all.

Practical combinations

Specifically, RSI tends to work better when filtered through trend context:

  • In an uptrend, treat oversold (below 30 or 40) as a pullback entry signal.
  • In a downtrend, treat overbought (above 60 or 70) as a pullback short signal.
  • Avoid counter-trend RSI signals in strong trending markets — the band walks the indicator.

Risks to flag

RSI lags and produces frequent false signals in trending markets. “Overbought” can stay overbought for weeks during a strong trend. There are no guarantees — use stops, size conservatively, and don’t treat any single indicator as a complete strategy.

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