Reading Charts . Lesson 6 of 12

Relative Strength Index

How beginners use RSI to spot oversold buy clues, overbought sell warnings, and momentum shifts.

RSI stands for Relative Strength Index. It is a momentum indicator that moves between 0 and 100. Beginners use it to answer one simple question: has price moved too far, too fast?

The two most important RSI levels are 70 and 30. Above 70 is called overbought. Below 30 is called oversold. But this is the important part: overbought does not automatically mean sell, and oversold does not automatically mean buy. The clearer beginner signal is often the cross back out of the extreme zone.

Part One

The beginner rule: 30 is the buy watch zone, 70 is the sell watch zone

When RSI falls below 30, the stock has been sold heavily. This is called oversold. It means the stock may be stretched to the downside and could bounce. But it does not mean you buy instantly. In a strong downtrend, RSI can stay oversold or keep returning to oversold.

When RSI rises above 70, the stock has rallied strongly. This is called overbought. It means the stock may be stretched to the upside and could pull back. But it does not mean you sell instantly. In a strong uptrend, RSI can stay overbought for longer than beginners expect.

Part Two

Buy signal one: RSI crosses back above 30

The simplest RSI buy signal is not RSI being below 30. The clearer signal is when RSI moves back above 30 after being oversold. This says selling pressure may be easing and momentum may be turning up again.

For beginners, the cleanest version is: price reaches support, RSI falls below 30, price stops falling, and RSI crosses back above 30. The RSI cross is the clue. Support or price strength is the confirmation.

Part Three

Sell signal one: RSI crosses back below 70

The simplest RSI sell warning is the opposite. RSI moves above 70, showing strong recent momentum, then crosses back below 70. That cross back below 70 says momentum may be cooling after a strong rally.

For beginners, this matters most near resistance or after a fast move up. If price is stretched, hits resistance, and RSI crosses back below 70, that can be a reason to take profit, tighten a stop, or avoid chasing.

Part Four

The 50 line: simple momentum confirmation

The 50 line is the middle of RSI. It is not as famous as 30 and 70, but it is useful for beginners. RSI above 50 means momentum is leaning bullish. RSI below 50 means momentum is leaning bearish.

A cross above 50 can confirm buyers are regaining control after weakness. A cross below 50 can confirm sellers are regaining control after strength. This signal is slower than the 30/70 cross, but it can help you avoid acting too early.

Simple Signal Summary

Four RSI signals beginners should know

RSI Signal	What It Means	Beginner Action
Cross back above 30	Selling pressure may be easing.	Possible buy clue.
Cross back below 70	Buying momentum may be cooling.	Possible sell warning.
Cross above 50	Momentum shifts back toward buyers.	Buy confirmation.
Cross below 50	Momentum shifts back toward sellers.	Sell confirmation.

Part Five

Bullish divergence: when price makes a lower low but RSI improves

Divergence is more advanced, but it is one of RSI’s most useful signals. Bullish divergence happens when price makes a lower low, but RSI makes a higher low. In plain English, price is still falling, but momentum is not falling as hard as before.

This can be a buy watch signal, especially near support. It does not mean buy instantly. It means selling pressure may be weakening, so you watch for a bounce, a higher low, or RSI crossing back above 30 or 50.

Part Six

Bearish divergence: when price makes a higher high but RSI weakens

Bearish divergence is the opposite. Price makes a higher high, but RSI makes a lower high. In plain English, price is still rising, but momentum is not confirming the new high.

This can be a sell warning, especially near resistance or after a strong rally. It does not mean the stock must crash. It means the move may be losing strength, so beginners should avoid chasing and watch for rejection, a trend break, or RSI crossing below 70 or 50.

Part Seven

Always filter RSI with the trend

RSI becomes more useful when you know the trend. In an uptrend, oversold RSI readings often create better buy opportunities. In a downtrend, overbought RSI readings often create better sell or avoid signals.

A simple beginner filter is the 200 day moving average. If price is above the 200 day moving average, focus more on RSI buy signals. If price is below the 200 day moving average, be more cautious with RSI buy signals and pay more attention to RSI sell warnings.

Buy Signals from RSI

When RSI supports a buy idea

Signal	What to Look For	Best Confirmation
Oversold cross back	RSI drops below 30, then crosses back above.	Support bounce or green candle.
RSI 50 break up	RSI rises through 50 from below.	Breakout or higher low.
Bullish divergence	Price lower low, RSI higher low.	Price stops falling and turns up.
Uptrend RSI pullback	Price above 200 SMA, RSI cools then recovers.	Trend remains intact.

Sell Signals from RSI

When RSI warns you to exit or avoid

Key Takeaways

Six things to take from this lesson

01	RSI moves between 0 and 100 and measures momentum.
02	Below 30 is oversold. Above 70 is overbought. These are watch zones, not automatic trades.
03	A cross back above 30 can be a buy clue. A cross back below 70 can be a sell warning.
04	The 50 line helps confirm momentum. Above 50 leans bullish. Below 50 leans bearish.
05	Divergence is stronger but more advanced. Use it as a warning, then confirm with price.
06	RSI works best when paired with support, resistance, trend, and volume.

Five Commitments

What you commit to before moving on

Read each one. If you cannot honestly commit to it, the lesson is not finished.

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End of Lesson

Reading Charts . Lesson 6 of 12 . Continue to Moving Averages.