What is the RSI?
The RSI is a momentum indicator that measures how fast and how much a stock's price has changed over the last 14 periods (usually 14 days). It outputs a number between 0 and 100.
Think of it as a speedometer for price movement. A reading near 100 means the stock has been going up very fast. A reading near 0 means it's been going down very fast. Readings in the middle suggest balanced buying and selling pressure.
RSI Levels Explained
Stock has risen too fast. Potential reversal or pullback coming. Consider taking profits or waiting for confirmation before buying.
Momentum is positive. In uptrends, RSI often stays in this zone. Good area to hold or add to winning positions.
Momentum is weak. In downtrends, RSI often stays in this zone. Avoid buying until momentum recovers above 50.
Stock has fallen too fast. Potential bounce or reversal. Look for other confirmation signals before buying.
The Most Common RSI Mistake
RSI above 70 does NOT automatically mean sell.
Strong stocks in strong uptrends can stay overbought for weeks or months. NVIDIA spent most of 2023 with RSI above 70. If you had sold every time RSI crossed 70, you would have missed massive gains. Overbought means "be cautious" — not "sell immediately."
Similarly, a stock can stay oversold (below 30) for a long time during a genuine downtrend. Always use RSI alongside other signals.
RSI Divergence — The Most Powerful Signal
Divergence occurs when price and RSI move in opposite directions. It often signals a trend reversal:
Bullish Divergence (Buy Signal)
Price makes a lower low, but RSI makes a higher low. Means selling momentum is weakening even though price is still falling. Often precedes a reversal upward.
Bearish Divergence (Warning)
Price makes a higher high, but RSI makes a lower high. Means buying momentum is weakening even as price still rises. Can signal an upcoming pullback.
How to Use RSI Practically
Check the trend first
Is the stock in an uptrend or downtrend? RSI signals work differently in each. In uptrends, buy dips to RSI 40-50. In downtrends, RSI 60-70 is often a good shorting or exit opportunity.
Use RSI 30/70 as alerts, not triggers
When RSI hits 30 or 70, pay attention — but wait for price confirmation (a reversal candle, a break of a support/resistance level) before acting.
Look for divergences at extremes
The most reliable divergence signals happen when RSI is already in oversold or overbought territory AND diverges from price.
Combine with volume
A bounce from RSI oversold with high volume is more reliable than a low-volume bounce. Volume confirms institutional buying.
Use the 50 level as trend confirmation
RSI crossing above 50 signals bullish momentum. Crossing below 50 signals bearish momentum. Some traders only take long positions when RSI is above 50.
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