Most traders treat the RSI like a fortune teller. Price crosses 70, they sell. Price drops to 30, they buy. Clean, simple, completely wrong. The RSI doesn't predict reversals — it measures the speed and magnitude of recent price changes. That's it. Confusing momentum with prophecy is how accounts quietly bleed out.

J. Welles Wilder developed the RSI in 1978 using a 14-period default. The formula compares average gains to average losses over those 14 candles, producing a value between 0 and 100. A reading of 70 doesn't mean "overpriced" — it means buyers have dominated sellers across those 14 periods with unusual aggression. That's a momentum signal, not a valuation one.

CONCEPTRSI measures the ratio of average gains to average losses — it scores momentum velocity, not price fairness.
WARNINGTrading RSI overbought/oversold levels in isolation is one of the most reliably expensive habits in retail trading.
KEY IDEAIn a strong uptrend, RSI can stay above 70 for weeks — "overbought" just means the trend is healthy.

Here's the practical problem. During a strong uptrend, RSI can pin itself above 70 for extended periods. A trader selling every time RSI hits 70 in a bull run gets chopped to pieces. Wilder himself noted that overbought and oversold readings require trending context to be useful. Divergence — where price makes a new high but RSI doesn't — is where the indicator earns its keep.

Price RSI New High Lower High Divergence Time → Value RSI 70

Bearish divergence — price printing a higher high while RSI prints a lower high — has historically caught traders' attention because it signals weakening momentum before price confirms it. Traders typically watch for this on the 14-period default, though some tighten to 9 periods for faster signals on intraday charts. The RSI also works as a trend filter: some traders only take long setups when RSI stays above 50, treating the midpoint as a momentum regime indicator. For the full mathematical background, Investopedia's RSI breakdown covers Wilder's original average gain/loss calculation clearly. The Wikipedia entry on the Relative Strength Index includes the smoothed moving average variant Wilder used. And if momentum indicators interest you broadly, Investopedia's momentum indicator overview puts RSI in proper context alongside similar tools.

RSI is a momentum speedometer, not a buy/sell oracle. Use it to confirm trend strength or spot divergence — not to predict turning points from thin air.

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