Ticker&TapeRSI: the Relative Strength Index explained
The RSI is a momentum gauge that swings between 0 and 100. It tells you how hard a stock has been pushing up or down lately. It is useful, but it is not a buy or sell signal on its own.
What the RSI measures
The Relative Strength Index (RSI) compares the size of a stock's recent up days with the size of its recent down days, usually over the last 14 bars. If most of the recent movement was up, the RSI rises toward 100. If most was down, it falls toward 0.
Do not confuse it with relative strength in the O'Neil sense. The RSI only looks at the stock against its own past. The RS line and RS Rating compare the stock with the market and with other stocks, which matters much more for finding leaders.
How to read 70 and 30
Textbooks say an RSI above 70 is overbought and below 30 is oversold. Many beginners read that as sell above 70 and buy below 30. For growth stocks this is usually backwards.
A true leader breaking out of a base often pushes its RSI above 70 and keeps it there for weeks. Overbought here means strong demand, not a top. Selling a leader just because the RSI hit 75 can cut a big winner short. Meanwhile, a stock stuck below 30 is usually weak for a reason, and weak stocks tend to stay weak.
- Above 50 and rising: momentum is on the buyers' side.
- Above 70 for a long stretch: often a sign of a powerful uptrend.
- Below 50 and falling: sellers are in control.
- Below 30: weak; wait for the stock to repair before you care about it.
Divergences
A divergence happens when price and the RSI disagree. A bearish divergence is when price makes a new high but the RSI makes a lower high. It says the push is losing energy. A bullish divergence is the opposite: price makes a lower low while the RSI makes a higher low.
Divergences are warnings, not orders. A stock can show a bearish divergence for weeks and keep climbing. Treat it as a reason to watch volume and the 50-day line more closely, not as a reason to sell on the spot.
How traders use it
In this method, price, volume and the base come first. The RSI is a second opinion. Some traders like to see the RSI holding above 50 during a base and climbing as the stock nears its pivot. Others use a sharp RSI spike after a long run as one hint, among others, that a stock is getting extended.
On the platform, open any chart, click Indicators and add the RSI panel. Compare how it behaves on a leader and on a laggard.
Common mistakes
- Selling a strong breakout just because the RSI is above 70.
- Buying a falling stock because the RSI is below 30.
- Acting on a divergence without any confirmation from price or volume.
- Confusing the RSI with the RS line or the RS Rating.
Key points
- The RSI measures a stock's momentum against its own past, on a 0 to 100 scale.
- Strong growth stocks can stay overbought for weeks; that is a feature, not a flaw.
- Use the RSI as a secondary tool after price, volume and relative strength.
Check what you learned
Answer at least 2 of 3 correctly to complete the lesson.
1. A leader breaks out of a base and its RSI stays above 70 for weeks. How should you read that?
For growth stocks, the textbook 'sell above 70' is usually backwards. Selling a leader just because the RSI hit 75 can cut a big winner short.
2. How is the RSI different from the RS line?
The RSI only looks at a stock's own recent up and down moves. The RS line and RS Rating compare it with the market and other stocks, which matters more for finding leaders.
3. What is a bearish divergence, and how should you treat it?
A bearish divergence says the push is losing energy, but a stock can keep climbing for weeks. Use it as a reason to watch volume and the 50-day line more closely.
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