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The Relative Strength Index (RSI) measures the speed and size of recent price moves on a scale from 0 to 100. It's one of the most widely used momentum indicators because it's simple to read at a glance.
Readings above 70 are traditionally considered "overbought" (price has risen quickly and may be due to pause or pull back), while readings below 30 are considered "oversold." These are guidelines, not guarantees — a strong trend can stay "overbought" for a long time.
RSI is often more useful for spotting divergence — when price makes a new high or low but RSI doesn't confirm it — than for treating 70/30 as an automatic buy or sell signal. Like moving averages, it works best combined with other context, such as support/resistance or trend direction.
Real-World Example
A stock's RSI climbs above 70 as the stock rallies hard, flagging it as potentially overbought, but instead of reversing, the stock keeps climbing for another two weeks while RSI stays pinned above 70 the whole time, a reminder that overbought does not mean sell immediately in a genuinely strong trend. A different trader watches for RSI to actually turn back below 70 and start declining, using that shift rather than the overbought reading alone, before considering the momentum genuinely fading.
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