Module 7 · Lesson 3
RSI Indicator Explained: How to Read Overbought and Oversold
The Relative Strength Index, or RSI, measures the size of recent price gains compared with recent losses. It describes past momentum on a scale from 0 to 100; it does not tell you what the next price will be.
Quick answer
What does an RSI reading mean?
RSI summarizes recent upward and downward price changes for a chosen lookback period. A value near 70 reflects stronger recent gains relative to losses than a value near 30. Those commonly watched levels are descriptions of the calculation, not automatic buy or sell points.
How is RSI calculated?
The indicator compares an average of recent gains with an average of recent losses, then maps that relationship to a 0–100 scale. A common default uses 14 periods, but the chart interval and setting matter. It uses price changes, not company earnings or valuation.
What do 30 and 70 actually tell you?
Chart users often call a reading below 30 “oversold” and above 70 “overbought.” Those terms mean the recent price moves are extreme under the selected formula. A strong trend can keep RSI near an extreme for some time, and the thresholds can be adjusted. Neither level proves an imminent reversal.
What is RSI divergence?
Divergence is a comparison between price highs or lows and RSI highs or lows. For example, price can make a new high while RSI makes a lower high. That is an observation about slowing recent price momentum, not proof that a reversal will follow. Mark both dates before describing the pattern.
How should you compare two RSI charts?
Use the same security, time interval, lookback period, and price series. A 14-day RSI and a 14-week RSI answer different questions. Check the underlying price chart and any company event before drawing a conclusion from the oscillator alone.
What are the limits of this indicator?
A numerical threshold can look precise while the underlying interpretation is uncertain. In a strong rise, RSI may remain elevated; in a persistent decline, it may stay low. Repeated trades based on crosses can add costs and missed opportunities.
A real-data RSI calculation: February 2020
Sources: FRED: S&P 500 daily closing observations (S&P Dow Jones Indices data); StockCharts: RSI formula and Wilder smoothing. Prices checked October 8, 2026. Calculations below use these dated observations, not invented prices. The index series excludes dividends.
Use the 15 closes from February 3 through February 24, 2020 to obtain 14 daily changes. This deliberately starts a new 14-period RSI calculation on February 3. It is an initialization example; a chart using a longer earlier history can show a different RSI for February 24.
Show the dated closing-price inputs
| Date | Close |
|---|---|
| 2020-02-03 | 3,248.92 |
| 2020-02-04 | 3,297.59 |
| 2020-02-05 | 3,334.69 |
| 2020-02-06 | 3,345.78 |
| 2020-02-07 | 3,327.71 |
| 2020-02-10 | 3,352.09 |
| 2020-02-11 | 3,357.75 |
| 2020-02-12 | 3,379.45 |
| 2020-02-13 | 3,373.94 |
| 2020-02-14 | 3,380.16 |
| 2020-02-18 | 3,370.29 |
| 2020-02-19 | 3,386.15 |
| 2020-02-20 | 3,373.23 |
| 2020-02-21 | 3,337.75 |
| 2020-02-24 | 3,225.89 |
| Calculation | Result |
|---|---|
| Total positive changes | 170.68 points |
| Total absolute negative changes | 193.71 points |
| Average gain = 170.68 / 14 | 12.191429 |
| Average loss = 193.71 / 14 | 13.836429 |
| RSI = 100 − 100 / (1 + average gain / average loss) | 46.84 |
The next observed close, February 25, was 3,128.21, a loss of 97.68 points. Wilder’s next average gain is (12.191429 × 13 + 0) / 14; the next average loss is (13.836429 × 13 + 97.68) / 14. Using unrounded averages gives an RSI of 36.35. This shows how a further loss changes the indicator. It does not predict the next day’s price or identify a trade.
Key takeaways
- RSI compares recent price gains with recent losses; it is not a valuation measure.
- Lookback, chart interval, smoothing and starting history affect the reading.
- An extreme RSI can persist and does not guarantee a reversal.
Check your understanding
1. What does RSI use as its main input?
A. Recent price gains and losses. B. The company’s debt. C. A guaranteed future price.
Show answer and feedback
A. RSI is calculated from recent price changes.
2. Does RSI above 70 require a sale?
A. Yes, always. B. No; it describes a historical extreme that can persist. C. Only if volume is high.
Show answer and feedback
B. A threshold is not a reliable instruction or prediction.
3. Which comparison is like-for-like?
A. 14-day RSI and 14-week RSI. B. RSI for two unrelated settings. C. The same security and interval with the same lookback setting.
Show answer and feedback
C. Keep the period and settings consistent.
Why question: Why can RSI stay above 70 while price continues to rise?
Show a sample explanation
A series of continued gains can keep the average gain large relative to the average loss. The oscillator reflects recent data, not a ceiling on price.
Observe AAPL with this indicator
Open StockEducation’s chart tool with AAPL loaded. Open the AAPL chart and, if the current tool offers RSI, set a daily 14-period view. Record a date near a high or low reading and compare it with the next two price bars. If RSI is unavailable, use the chart to identify a run of gains and a run of losses, then explain which run would tend to raise or lower RSI. Do not turn the observation into a trade instruction.
Where can you check the definition and risk context?
- Fidelity: Relative Strength Index
- FINRA: What Is Market Timing?
- FINRA: Stocks and Price Volatility
- SEC Investor.gov: Introduction to Investing
End of Lesson · Continue to the Next Topic
AI responses are for educational purposes. Always verify with official course materials.
This lesson teaches a concept. It is general education, not advice about your money. Before you act on anything you learn here, speak to someone licensed.
Sources and reference material
Primary sources and original reference material for the concepts discussed on this page.
- FRED: S&P 500 daily closing observations
- Fidelity: Relative Strength Index
- FINRA: market timing and buy-and-hold strategies
- FINRA: Stocks
- SEC Investor.gov: Introduction to Investing
References added 14 October 2026.
AI responses are for educational purposes. Always verify with official course materials.
This lesson teaches a concept. It is general education, not advice about your money. Before you act on anything you learn here, speak to someone licensed.
This lesson teaches a concept. It is general education, not advice about your money. Before you act on anything you learn here, speak to someone licensed.
