The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes on a scale of 0 to 100. Traditionally, readings above 70 are called "overbought" and below 30 "oversold." It is meant to gauge whether a move has run hot or cold relative to its own recent history.

What it actually measures

RSI compares the size of recent up-moves to recent down-moves over a set period (commonly 14 bars). A high reading means gains have dominated; a low reading means losses have. It is a measure of momentum, not price - two very different things, which is where the confusion starts.

The overbought trap

Here is the mistake that costs people money: "overbought" does not mean "about to fall." In a strong trend, RSI can pin above 70 for a long time while price keeps climbing. Traders who short every "overbought" reading get run over by trends. RSI signals are far more reliable in range-bound, mean-reverting conditions than in trending ones - so the regime matters more than the reading.

Overbought is not a sell signal. In a real trend, it is just the trend doing its job.

Using it as one input

RSI is best as context, not a trigger. Divergence - price making a new high while RSI does not - can hint that momentum is fading, but it is a warning, not a timer. Like every indicator, RSI is built from past prices and lags the present. Pair it with structure and the volatility regime, and it becomes a useful gauge; treat it as a standalone signal and it will whipsaw you.