What is RSI? A complete guide for stock investors

RSI – Relative Strength Index – is probably the most widely used momentum indicator in the world. It's plotted as a curve between 0 and 100 below the price chart, and almost every serious investor has an opinion about it. The problem is that most people use RSI completely wrong.

This guide walks through what RSI actually measures, how to read it correctly, and why the "classic" 30/70 trick rarely works in a strong trend.

What does RSI actually measure?

RSI was developed by J. Welles Wilder in 1978 and is calculated over a period (usually 14 days) by comparing the size of recent gains to recent losses:

RSI = 100 - (100 / (1 + RS))

where RS = average gain / average loss over the period.

In practice: RSI measures how fast and how forcefully price is moving up compared to down. Not price itself — momentum.

The three levels of interpretation

Level 1: Beginner — "30 = buy, 70 = sell"

You've definitely read this. And it's a good starting point — but a dangerous rule if you follow it blindly. In a strong uptrend RSI can stay above 70 for weeks without the stock falling. Sell then and you'll miss the entire move.

Level 2: Intermediate — trend context

Experienced investors adjust the levels by trend:

• In an uptrend: RSI 40 acts as the "new 30" (buy zone on pullbacks). You need RSI 80+ before overbought becomes relevant.
• In a downtrend: RSI 60 acts as the "new 70" (sell zone on bounces).

Practical rule: always compare RSI against a moving average of price (e.g. SMA50). If price is above SMA50 → use uptrend rules.

Level 3: Advanced — divergence

The truly valuable signal is RSI divergence:

• Bullish divergence: Price makes a lower low, but RSI makes a higher low. Sellers are losing strength — often an early reversal signal.
• Bearish divergence: Price makes a higher high, but RSI makes a lower high. Buyers can't keep up — warning of a fall.

Divergence isn't a trading signal on its own, but it's an excellent warning to combine with other tools (volume, candlestick patterns, support/resistance).

Common pitfalls

1. Believing 70 = "too expensive". Tesla, Nvidia, Investor B — all have stayed above RSI 70 for months during strong rallies. Don't sell just because RSI is "high".
2. Using the same period everywhere. RSI 14 is standard on daily charts. Use 9 on weekly charts. For day trading: 7 or 5 gives faster signals but more noise.
3. Ignoring the timeframe. RSI 70 on the 1-hour chart means nothing for a long-term position.
4. Stacking too many indicators. RSI + MACD + Bollinger Bands + Stochastic on the same chart = analysis paralysis. Pick 2 indicators that measure different things.

RSI on Nordic stocks — a practical example

On the Stockholm exchange RSI is especially useful for stocks with clear sector rotation — like industrials and banks. When the whole sector is oversold, RSI < 30 across several stocks at once is often a good cue that rotation is near.

For commodity-driven stocks (Boliden, SSAB) RSI works worse, because the underlying commodity price drives the chart more than internal momentum.

Summary

• RSI measures momentum, not value.
• 30/70 is a starting point — not a rule. Adapt to trend.
• Divergence is RSI's most valuable signal.
• Use RSI together with a trend indicator (SMA50/200), not on its own.
• Different periods for different timeframes.

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