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📊 Momentum · RSI

Complete Guide to the RSI Indicator
— Reading Overbought and Pullbacks in Practice

RSI (Relative Strength Index) expresses the speed of gains vs. losses over 14 days as a 0–100 value. Beyond just a simple overbought/oversold read, we explain how to use it in practice to catch pullback entry timing.

Written by Dawn · IT Engineer · Published
💡 Key takeaway — RSI is a momentum indicator that views the balance between the speed of gains and losses as 0–100. "70 means sell, no matter what" is a misread — use it as a filter for overheating and entry timing instead.

What Is RSI?

RSI (Relative Strength Index) is a momentum indicator that expresses the balance between the speed of gains and the speed of losses over a given period (typically 14 days) as a value between 0 and 100. It was devised in 1978 by Welles Wilder — the higher the value, the stronger the upward pressure; the lower, the stronger the downward pressure.

How It's Calculated

RSI = 100 − (100 ÷ (1 + RS)), where RS = 14-day average gain ÷ 14-day average loss.

If up days are larger than down days, RS grows larger and RSI moves closer to 100. The convention is to treat 70+ as overbought and 30 or below as oversold.

The Overbought/Oversold Trap

The most common beginner mistake is "sell once RSI hits 70." But in a strong trend, RSI can stay at 70 or above for weeks to months. Overbought doesn't mean "about to fall" — it can be a signal that the trend is "strong." Conversely, oversold (30 or below) can go even deeper in a bear market. RSI needs to be interpreted differently depending on the range.

How DawnScan Uses It

  • RSI 40–55 (pullback zone) — an un-overheated bounce setup, scores extra points
  • RSI under 30 (extreme oversold) — a technical-bounce setup, scores extra points
  • RSI 70–81 (accelerating momentum) — watch closely, but no penalty
  • RSI 82+ (short-term overheating) — a strong penalty reflecting chase risk
Key point — DawnScan doesn't treat RSI as "high = bad." It uses it as a filter for entry timing and overheating risk. The goal is to filter out names that have already run too far and focus on names "right before they run."

RSI Divergence

  • Bearish divergence — price makes a new high, but RSI is lower than its prior high → a warning that momentum is weakening
  • Bullish divergence — price makes a new low, but RSI is higher → a possible bounce

Combine With Other Signals

RSI only looks at momentum, so pair it with supply/demand and trend. Check supply/demand with OBV accumulation, volatility with the Bollinger squeeze, and trend with ADX. For how to combine them, see the pre-surge signal overview and methodology.

Caution — Don't trade off the RSI number alone. All information here is for reference only, and the investment decision and its outcome are your own responsibility.

Check It Now

See how each stock's RSI combines with other signals on today's scan.

📮 Daily US Market Morning Brief — We send an analysis of the previous day's top 10 US gainers (TOP10) and what they had in common, every day at 8am (KST). Telegram @dawnbrief · Free · No ads · Not stock recommendations.

Frequently Asked Questions

How is RSI calculated?

RSI = 100 − (100 / (1 + RS)). RS = the average gain over the most recent 14 days / the average loss over the most recent 14 days. The closer RSI is to 100, the stronger the upward momentum; the closer to 0, the stronger the downward pressure. The convention treats 70+ as overbought and 30 or below as oversold.

How does DawnScan use RSI?

DawnScan treats the RSI 40–55 range as a "pullback setup condition." An overbought (70+) stock gets a score penalty that reflects chase risk. Specifically, RSI 82 and above gets a strong penalty. An extreme oversold range under RSI 30, on the other hand, gets bonus points as a technical-bounce setup.

Should I always sell once RSI hits 70?

No. In a strong trend, RSI often stays at 70 or above for weeks to months. On DawnScan, RSI 70–81 is treated as "momentum accelerating" — worth watching, but no penalty. A short-term overheating penalty only kicks in from RSI 82 and up.

What is RSI divergence?

When price sets a new high but RSI is lower than its prior high, that's called "bearish divergence" — a warning sign that momentum is weakening. Conversely, if price sets a new low but RSI is higher than its prior low, that's "bullish divergence," suggesting a possible bounce.
🔵
Bollinger Band Squeeze
Reading volatility contraction alongside RSI
🧭
ADX Trend Strength
Combining an RSI pullback with trend confirmation
💧
OBV Accumulation Signal
Checking supply/demand alongside an RSI pullback

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