RSI

What RSI actually measures

The Relative Strength Index compares the size of recent gains to the size of recent losses over a lookback, usually 14 periods, and expresses it as a number from 0 to 100. It is a measure of momentum, not of value. That distinction is where most of the damage happens.

Overbought does not mean expensive

RSI above 70 means price has risen quickly relative to its recent falls. It does not mean price is too high, and it is not a reason to sell. In a strong trend RSI can sit above 70 for weeks while price keeps rising, and traders who fade each reading get run over repeatedly.

The counterintuitive truth is that sustained overbought readings are a sign of strength, not of exhaustion. The same applies to oversold readings in a downtrend.

Divergence, and why it is still only context

Divergence is price making a new extreme while RSI does not, which says the move is being made with less momentum than the last one. It is the most useful thing RSI offers, and it is still not a signal. Divergence can persist for a long time, and acting on the first instance is a well-documented way to lose money early in a trend that has plenty left.

Treat divergence as a reason to tighten risk or to stop adding, not as a reason to reverse.

The lookback changes everything

RSI(14) and RSI(7) tell different stories about the same chart, and neither is correct. Shorter settings produce more extreme readings more often. If a strategy only works at one specific setting found by testing many, that is curve fitting rather than discovery.

What to do with this

• Never fade a strong trend because an oscillator printed a number.
• Use RSI to describe momentum, and use price structure to decide direction.
• If you use divergence, require it to coincide with a level that already mattered.