RSI: Overbought, Oversold and Divergence
RSI measures the speed of a move, not its rightness. "Overbought" is not a sell signal — believing it is has ruined more accounts than any other idea.
RSI compares the size of recent gains to the size of recent losses and turns that into a number between 0 and 100. Above 70 the market has been rising fast; below 30 it has been falling fast. That is the whole message: speed, not direction, and certainly not value.
The mistake almost everybody makes
"RSI is at 78, gold is overbought, I will short it." In a strong trend RSI can sit above 70 for weeks while price keeps climbing — that reading is what a powerful trend looks like, not a warning that it is ending.
Overbought in a trend is a reason to manage risk. It is never on its own a reason to trade against the direction.
Divergence — the part that is worth learning
Divergence is when price and momentum disagree: price makes a higher high while RSI makes a lower high. The new high was reached with less force than the last one, which often means the buyers are running out.
It is a warning about momentum, not a timing tool. Divergence can persist through three more highs before anything happens.
Using it without fooling yourself
- Trade with the structure — Take an RSI signal only when price structure agrees. Divergence plus a break of structure is a setup; divergence alone is a note.
- Change the levels in a trend — In a strong uptrend 40 often acts as the floor instead of 30 — the market never gets "cheap" while it is trending.
- One timeframe at a time — Daily RSI and 15-minute RSI routinely say opposite things. Pick the timeframe you actually trade.