RSI and divergence
- What RSI measures
- Why "overbought" is not a sell signal
- Reading bullish and bearish divergence
What RSI measures
The Relative Strength Index compares the size of recent up-closes with recent down-closes over 14 candles and scales it 0–100. Above 50: gains have outweighed losses. Above 70 is called overbought, below 30 oversold.
"Overbought" is not a sell signal
In a strong uptrend RSI can stay above 70 for a long time — that is what strength looks like. Selling every 70 reading in a trend is one of the most common beginner losses. A more useful reading: in uptrends RSI tends to hold above 40 on pullbacks; in downtrends it struggles to get above 60.
Divergence
Bearish divergence: price makes a higher high, RSI makes a lower high — the new high was made with less momentum. Bullish divergence: price makes a lower low, RSI a higher low.
Divergence is a warning that a move is tiring, not a timing signal: divergences can stack two or three times before the turn. Use it with structure — a divergence plus a change of character is far more meaningful than a divergence alone.
Check yourself
1. RSI has been above 70 for 10 candles in a strong uptrend. This means…
- Sell now
- The trend is strong; overbought alone is not a signal ✓
- A crash is due
2. Price makes a lower low, RSI makes a higher low. This is…
- Bearish divergence
- Bullish divergence ✓
- Confirmation of the downtrend
Terms in this lesson
- Divergence
- Price and an oscillator disagree (e.g. higher high in price, lower high in RSI).
- Overbought / oversold
- RSI above 70 / below 30 — not a signal on its own.
- RSI
- Relative Strength Index: recent up-closes vs down-closes, 0–100.