RSI Explained: Overbought, Oversold and Divergence

The Relative Strength Index measures how strongly price has been rising compared with how strongly it has been falling. It is one of the most used — and most misused — indicators.

How RSI is calculated

RSI, created by J. Welles Wilder in 1978, looks at a number of recent candles — 14 by default. It averages the size of the up-closes and the size of the down-closes over that window, using Wilder's smoothing, and compares them:

RSI = 100 − 100 ÷ (1 + average gain ÷ average loss)

The result always sits between 0 and 100. If every recent close was higher, RSI approaches 100; if every close was lower, it approaches 0; balanced gains and losses put it near 50.

Overbought and oversold

The classic bands are 70 and 30. Above 70, price has risen fast enough to be called "overbought"; below 30, "oversold". The important word is fast: RSI measures momentum, not value.

In a strong uptrend RSI can stay above 70 for weeks while price keeps climbing. Selling simply because RSI crossed 70 is one of the most common losing habits. Many traders instead use the 50 line as a trend filter: RSI holding above 50 suggests buyers are in control, below 50 sellers.

In OrderView you can change the length and both bands, show a middle line at 50, add a moving average of RSI, or show up to three RSI lines with different lengths in the same panel.

Divergence

A divergence appears when price and RSI disagree:

• Bullish divergence: price makes a lower low, but RSI makes a higher low. Selling pressure is fading even though price dipped further.
• Bearish divergence: price makes a higher high, but RSI makes a lower high. The push upward is weakening.

Turn on Show divergences in the RSI settings and OrderView marks them for you, confirming each swing five candles after it forms so that the marks do not repaint.

A divergence is a warning, not a signal to act alone. Strong trends often print several divergences before they turn — or never turn at all.

Ways traders combine RSI

• With trend: in an uptrend on a higher timeframe, look for RSI to dip toward 40–50 and turn up, rather than waiting for 30.
• With levels: an oversold reading at a support level that held before is more meaningful than one in empty space.
• With confirmation: wait for a candle to close back in the direction you expect.

Common mistakes

• Treating 70 as "sell" and 30 as "buy" in every market.
• Changing the length until past signals look perfect — that is fitting noise.
• Reading RSI on a candle that has not closed yet.

Educational information only, not investment advice. Try RSI on a live chart in the web app.