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The most common momentum indicator in technical analysis — what it actually measures, what 'overbought' and 'oversold' mean, and when it gives a false signal.
RSI (Relative Strength Index) is a momentum indicator ranging from 0 to 100, measuring the speed and magnitude of a stock's recent price changes over a given period (typically 14 trading days). It's calculated from the ratio of average gains to average losses over that period.
An RSI value above 70 is traditionally considered 'overbought' — the stock has risen sharply and a pullback or correction may be near. A value below 30 is considered 'oversold' — a sharp decline that may indicate an overreaction. These aren't automatic buy/sell signals, just a description of how strong the recent move has been.
In a strong trend (a sustained rally or decline), RSI can stay 'overbought' or 'oversold' for a long stretch without the price correcting at all — a stock in strong momentum can 'stay expensive' far longer than simple intuition suggests. Blindly relying on RSI alone during strong trends is a common mistake among beginner investors.
RSI is one of roughly 23 indicators in the Technical Analysis category (25% of the score), always checked together with other indicators (MACD, moving averages, trading volume) to build a picture of agreement across several signals, not to rely on a single indicator.
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The information in this guide is intended for general educational purposes only and does not constitute investment advice. Full details on the disclaimer page.