What Is RSI? Oversold and Overbought Stocks Explained
RSI — the Relative Strength Index — is a momentum gauge that runs from 0 to 100 and measures how fast and how far a stock's price has moved recently. Below 30 is traditionally called 'oversold' (the move down may be overdone); above 70 is 'overbought' (the move up may be stretched). It's one of the most popular technical indicators, but it's a clue, not a buy or sell button.
What is the Relative Strength Index (RSI)?
RSI is a technical indicator, created by J. Welles Wilder, that compares the size of a stock's recent gains to its recent losses over a set period — usually 14 days — and expresses the result on a 0–100 scale. A high RSI means recent gains have dominated; a low RSI means recent losses have. It's used to judge momentum and whether a move has gone too far, too fast.
What does 'oversold' mean (RSI below 30)?
An oversold stock is one whose RSI has dropped below 30, meaning it has fallen hard and fast relative to its recent history. The idea is that selling may be overdone and a bounce could follow. But 'oversold' doesn't mean 'cheap' or 'safe' — a stock in a genuine downtrend can stay oversold for a long time while it keeps falling. Oversold is a signal to investigate, not an automatic buy.
What does 'overbought' mean (RSI above 70)?
An overbought stock has an RSI above 70 — it has risen sharply and may be due for a pause or pullback. As with oversold, it's not an automatic sell: strong stocks in powerful uptrends can stay overbought for weeks. It flags that the move is extended, nothing more.
How to use RSI to find oversold stocks (step by step)
- Screen for RSI below 30 to get a list of oversold candidates. Our free oversold stocks screener does this automatically.
- Check the trend — oversold in an uptrend (a dip) is very different from oversold in a downtrend (a falling knife).
- Find out why it fell — a one-off overreaction is an opportunity; deteriorating fundamentals are a warning.
- Confirm with the fundamentals — a stock that's oversold but still earns a strong ST Score is more interesting than one that's oversold and weak.
- Wait for a turn — many traders wait for RSI to cross back above 30 before acting, to avoid catching a stock mid-fall.
Common mistakes with RSI
- Buying every oversold stock — in a downtrend, oversold can get more oversold.
- Ignoring the trend and the catalyst behind the move.
- Using RSI alone — it works best alongside price trend, volume and fundamentals.
- Forgetting the timeframe — RSI on a daily chart says something different from RSI on a weekly chart.
What is a good RSI level?
There's no single 'good' number — it depends on your goal. Classic levels are 30 (oversold) and 70 (overbought), but many traders tighten them to 40/60 in strong trends or widen them to 20/80 for extremes. The most useful reading is relative: how the current RSI compares to the stock's own recent range and the direction of the trend.