Imagine you're sprinting up a hill. After the first 30 seconds you're flying. After two minutes, your legs are burning. After five minutes, you're basically crawling. At some point your body has to slow down or stop — even if you really want to keep going.

Prices behave the same way. After a long run up, eventually buyers get tired. They've already bought, the easy money is made, and there's nobody left who wants to chase the price higher. RSI, short for Relative Strength Index, is a number that tries to measure that tiredness.

What it measures

RSI compares the size of recent gains to the size of recent losses, usually over the last 14 candles. The result is a single number between 0 and 100.

  • 50 — perfectly balanced. Equal up-moves and down-moves recently.
  • Above 70 — overbought. Recent days have been overwhelmingly bullish; momentum has been one-sided.
  • Below 30 — oversold. Recent days have been overwhelmingly bearish.

"Overbought" doesn't mean the price has to fall. It means the rally has been extreme enough that a pause or a small pullback is statistically likely. Same for "oversold" on the downside.

How to actually use it

Three honest ways traders use RSI:

  1. Trend confirmation. In a strong uptrend, RSI usually stays between 40 and 80, rarely dipping below 40. In a strong downtrend, RSI usually stays between 20 and 60, rarely climbing above 60. If you're in a market and RSI behaves outside its normal range, the trend might be changing.
  2. Mean-reversion signal. In choppy, sideways markets — where price ping-pongs between support and resistance — RSI extremes are good fade signals. Above 70? Sell the rally. Below 30? Buy the dip.
  3. Divergence. If price makes a new high but RSI makes a LOWER high, the second push was weaker than it looked. That's a bearish divergence, and it often shows up before significant tops. Same in reverse for bottoms.

Common mistakes

The biggest mistake newcomers make is shorting every market they see above 70. In a strong uptrend, RSI can sit above 70 for weeks. The market that "looks too high" keeps grinding higher, and the impatient seller gets stopped out over and over.

RSI isn't a sell signal at 70. It's a "pay attention" signal at 70. The actual sell signal comes from price action confirming the warning.

Same the other direction: an oversold market can stay oversold. RSI of 25 in a crash isn't a "buy" — it's a "the bleeding might not be over". Wait for price to actually stabilize before reaching for falling knives.

Momentum (the bigger idea)

RSI is one specific way to measure momentum, but momentum is a broader concept. It's the rate at which price is changing. Imagine two cars: one is going 60 mph and slowing down; the other is going 60 mph and speeding up. Right now they're at the same speed, but in 30 seconds they'll be at very different speeds. Momentum captures that derivative.

When a trader says "momentum is negative", they mean recent price changes have been net-downward. When they say "momentum is fading", they mean the rate of increase is slowing — even if price is still going up. Both are useful pieces of information that RSI can capture.

For a gold watcher

Pull up daily gold with a 14-period RSI overlay. Watch what happens at extreme readings. You'll quickly notice that RSI above 70 in a downtrend rally is often a great fade — gold loves to disappoint people who chased the bounce. RSI below 30 in a downtrend often offers a 2-3 day bounce, but rarely marks the bottom. Use it as one ingredient in your decision, not the whole recipe.