Indicators
RSI (Relative Strength Index)
A 0-100 momentum gauge comparing recent up closes to down closes. Above 70 is overbought, below 30 oversold — a measure of speed, not a reversal signal on its own.
Also called: relative strength index, overbought, oversold
In practice
RSI on EUR/USD reaches 78, well into overbought. A naive trader shorts immediately and gets steamrolled as RSI stays above 70 for days. A disciplined trader waits for RSI to cross back below 70 with a bearish price candle before acting on the signal.
Why it matters for traders
RSI quantifies momentum in a single number, useful for spotting when a move has stretched too far — but only as confirmation, never as a standalone signal. The most common beginner mistake is shorting 'overbought' markets that can stay overbought far longer than a small account can stay solvent; RSI works only when combined with price context.
Common pitfall
The classic error is shorting 'overbought' and buying 'oversold' mechanically, then getting steamrolled because strong trends keep RSI extreme for long stretches. RSI is a momentum gauge, not a reversal order. Use it as confirmation alongside structure and price action — wait for RSI to exit the extreme with a confirming candle. Blindly fading extremes is one of the most common ways beginners lose to trends that 'should' reverse.
Lessons that use this term
- RSI, MACD and Bollinger Bands
Three more beginner-friendly indicators: momentum, trend changes, and volatility — with how to read each one.
Related terms
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