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What RSI measures, the real meaning of overbought, and the right use of divergence
Published by The Retail Trader · AUG 09, 2026 · Features
RSI is perhaps the most misunderstood indicator. People see 70 on the screen and think of selling, and then the stock goes up another 40%. The fault is not the indicator's.
RSI measures the ratio of upward moves to downward moves over the last several periods, and puts it on a scale of 0 to 100. That's all.
Meaning: RSI tells you how one-sided the recent rise has been. It does not tell you whether price is expensive or cheap.
RSI above 70 means the recent move has been very one-sided. In a strong trend this is perfectly normal — in fact, in the best trends RSI stays above 70 for weeks.
That is why 'overbought means sell' backfires: you are taking a trade against the strongest trend. Overbought is not a signal of reversal, it is a signal of strength.
Questions worth asking of RSI:
• How far has the pullback gone inside the trend — in an uptrend, RSI coming down to 40-50 and turning often gives a context for continuation.
• Is momentum changing — a steady decline in RSI even while price stays flat shows that the push is fading.
• Extremes in a range-bound market — when the market is clearly sideways, 70/30 become more useful. In a trending market, the same are useless.
• Divergence — price makes a new high, RSI stays below its old high. This is the most quoted and the most misused signal.
Divergence is a warning, not timing. In a strong trend, divergence can show up for months while price keeps rising. People who take the opposite trade on the first divergence often lose the whole trend.
A better use: when divergence appears, cut the size of new positions, or tighten the trailing stop. It says 'it may be time to leave', not 'go in the opposite direction'.
Many people keep changing the RSI period to find the setting that makes the signals look right on a past chart. That isn't learning, it's fitting. The setting that was perfect last year will be the first to break next year.
This article is for educational purposes only — it is not a buy or sell recommendation, makes no claim of guaranteed returns, and is not advice. Rules, rates and mechanics are changed from time to time by the exchanges, SEBI and RBI, so verify every number yourself with your broker or an official source.