RSI Overbought and Oversold Conditions Explained

RSI - the relative strength index - is a line between 0 and 100 that shows how one-sided recent price action has been. Above 70 is called overbought, below 30 oversold. Neither label means too expensive or too cheap. They mean that over the last 14 bars nearly all of the movement went one way. Welles Wilder, who published the indicator in 1978, meant the two levels as places to pay attention, not as triggers.

How the number is calculated

Average the gains across the last 14 candles, average the losses, and compare them. Fourteen straight up candles would read 100; fourteen down would read 0; a mixed stretch sits near 50. That is the whole idea - and it is why the reading is backward-looking by design. Every charting tool has it built in, from the chart on an exchange like Coinbase to standalone apps, usually set to 14 periods unless you change it.

What 70 and 30 are meant to flag

In a market going sideways they do roughly what the names suggest: a big-cap coin drifting in a flat month will often stall after tagging 70 and firm up after 30, because there is no trend pushing it further. Traders who find the standard levels too chatty widen them to 80 and 20, which fires less often and catches the more extreme stretches. Either way the reading is a prompt to look at the chart, not a conclusion on its own.

Why they are not buy and sell signals

Because a trend overwhelms them. Bitcoin's RSI has spent weeks above 70 during past rallies and weeks under 30 during past slides, and in both cases trading the threshold meant standing in front of the move. The line also knows nothing beyond its 14 bars: not the level just above, not what the asset is, not how large your position is. Used alone, it is a thermometer being asked to forecast the weather.

The practical version: use RSI as a second opinion on a level you already care about - a reading in the 20s where price is also sitting on support is interesting, the same reading in mid-air is not. If the line stays overbought while price climbs, read why that happens and what to do.