RSI — Intermediate — Growth Capital Group

The Concept

What RSI Actually Measures

The Relative Strength Index (RSI) is a momentum oscillator that compares the size of recent gains to recent losses, plotted on a scale of 0 to 100. It's typically calculated over a 14-period lookback (14 days on a daily chart). A high RSI means recent gains have dominated; a low RSI means recent losses have dominated.

The classic reading: RSI above 70 suggests an asset may be overbought — it's risen fast enough that a pullback or pause becomes more likely. RSI below 30 suggests oversold — it's fallen fast enough that a bounce becomes more likely. These aren't hard rules; a strong trend can keep RSI pinned above 70 for a long stretch.

The formula: RSI = 100 − (100 / (1 + RS)), where RS is the average gain over the lookback period divided by the average loss. You don't need to calculate this by hand day to day — every charting platform plots it automatically — but understanding the formula helps you see why it behaves the way it does.

📉 RSI Alongside Price

Notice RSI (purple) tends to lead or track the price swings above it: it climbs into the overbought zone as price rallies hard, and dips into the oversold zone as price falls hard. The value of RSI is spotting when that momentum looks stretched, not predicting the exact turn.

Watch For This

5 Things to Know About RSI

70/30 are guidelines, not laws — in a powerful trend, RSI can stay above 70 (or below 30) for a long stretch while price keeps moving the same direction.
Divergence is often more useful than the level itself — if price makes a new high but RSI makes a lower high, that's bearish divergence, a classic warning that momentum is fading even as price grinds higher.
Shorter lookback periods react faster but whipsaw more — the standard 14-period setting balances responsiveness against noise.
RSI works best paired with trend context — an oversold reading in an uptrend's healthy pullback is a very different signal from an oversold reading at the start of a real breakdown.
RSI is a momentum tool, not a valuation tool — it says nothing about whether a stock is cheap or expensive, only how fast it has recently moved.

Put It Into Practice

4 Things to Check When Reading RSI

🔍 Check for Divergence First

Compare RSI's recent peaks/troughs to price's — a mismatch is often more informative than the raw level.

📈 Read It With the Trend

In a strong uptrend, treat RSI dips toward 40-50 as the "oversold" zone that matters, not 30.

⏱️ Don't Trade the First Touch

RSI crossing above 70 doesn't mean "sell now" — wait for it to actually turn back down before treating it as confirmation.

🔗 Pair It With Support/Resistance

An oversold reading arriving right at a known support level is a much stronger combination than either signal alone.

Worth knowing: RSI describes recent momentum, not the future. A stock can stay "overbought" for weeks in a strong trend, and an "oversold" reading can keep falling further. Use it to gauge how stretched a move looks, alongside trend and volume — never in isolation.

Activity