RSI

How stretched the recent move is.

RSI: pushing into the extremes overbought RSI compares the size of recent gains to the size of recent losses, and expresses it from 0 to 100. It does not measure whether a stock is expensive. It measures whether the recent move has been one-sided. RSI = 100 − [100 ÷ (1 + average gain ÷ average loss)] Above 70 Conventionally 'overbought'. Really: gains have dominated losses lately. Below 30 Conventionally 'oversold'. Really: losses have dominated. The trap In a strong trend RSI can sit above 70 for weeks. Selling because it hit 70 means selling the strongest stock in the market. Divergence Price makes a new high, RSI makes a lower one. The move is getting weaker underneath. This is RSI's most useful reading. 'Overbought' does not mean 'about to fall'. It means 'has risen a lot'. Those are different statements, and confusing them is the single most common mistake made with this indicator. Bounded, so it is comparable across stocks Divergences are genuinely informative Good in ranges Actively misleading in strong trends The 70/30 thresholds are arbitrary conventions Encourages fighting the trend

Part of Learn NEPSE Investing, a free course on reading Nepali company accounts and charts. Section: Charts.