RSI: the market's breath
RSI turns the strength of recent rises and falls into a number between 0 and 100; above 70 describes a rise that was too fast, below 30 a fall that was too fast.
In the panel below the chart above there is a grey line: that is the RSI (Relative Strength Index). RSI compares the average of the rises over the last 14 candles with the average of the falls and turns the result into a number between 0 and 100. When rises dominate, RSI goes up; when falls dominate, it goes down.
In the panel you will see two dashed horizontal lines: 30 and 70. If RSI is above 70, price has risen very fast recently; this is called ‘overbought’. If it is below 30, price has fallen very fast; this is called ‘oversold’. The coloured dot at the right edge of the panel shows today's RSI value, and its colour tells you which zone it is in.
RSI is like a breath meter. A runner's breathing speeds up, but that does not mean they are about to stop. In a strong uptrend RSI can stay above 70 for days; in a strong downtrend it can live below 30 for a long time. So RSI dropping below 30 is not a ‘buy’ signal on its own; it is a warning that ‘selling has accelerated, a reaction may come’.
Compare the places where RSI touched 30 or 70 with the candles above. In some places, when RSI turned from an extreme, price turned too; in others price kept going in the same direction. The art of using RSI is reading that difference.
How to read it
- First check which zone RSI is in: below 30 is oversold, above 70 is overbought, between 30 and 70 is the normal zone.
- Read it together with the trend: in an uptrend, RSI dipping to the 40–50 area and turning up is often a more meaningful buying opportunity than RSI dropping below 30 in a downtrend.
- Wait for the turn from the extreme: not RSI dropping below 30, but RSI climbing back above 30 is a better sign that selling pressure is easing.
- Note where price and RSI move in opposite directions: this is called divergence and is covered separately in the last lesson of this path.
In this state right now
Liquid symbols whose RSI on the daily chart is currently below 30, meaning they have fallen very fast recently.
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We measured
When we studied reversal signals on 32 crypto pairs, RSI being in an extreme zone at the moment of the signal barely separated signals that worked from those that did not. The effect pointed the same way on every time frame, but it was so small that it made no practical difference. RSI being at an extreme is not an edge on its own.
Source: BBL measurement bench: 32 crypto pairs, 4 hour / 1 hour / 15 minute, about 80,000 MACD reversal signals ·
Trap
The most common mistake is trying to catch a falling knife because ‘RSI is below 30, so it is cheap’. In strong declines RSI can stay oversold for weeks while price falls a little more every day. RSI tells you speed has increased, not that the bottom has arrived. Before entering an oversold stock, at least wait for RSI to return above 30 and for price to hold at a support.
Tip
The ‘Oversold’ list in the screener shows exactly RSI below 30. When you pick a stock from it, ask the three questions from this lesson: which way is the trend, has RSI started to turn, is price at a support?
Glossary
- RSI
- An indicator measuring the strength of rises and falls over the last 14 candles on a 0–100 scale.
- Overbought
- RSI above 70; price has risen very fast recently.
- Oversold
- RSI below 30; price has fallen very fast recently.
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See oversold stocks in the screener →For information only, not investment advice.