RSI Indicator: How to Identify Overbought Stocks
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes. Developed by J. Welles Wilder Jr., it's one of the most widely used indicators for identifying overbought and oversold conditions.
Understanding RSI Values
RSI oscillates between 0 and 100, with key levels at:
- Above 70: Generally considered overbought - the stock may be due for a pullback
- Below 30: Generally considered oversold - the stock may be due for a bounce
- 50: The midpoint, often used to determine trend direction
RSI for Short Selling
When looking for short opportunities, traders often look for:
- RSI above 70: Indicates strong overbought conditions
- RSI above 80: Extreme overbought - higher probability of reversal
- Bearish divergence: Price makes higher highs while RSI makes lower highs
Combining RSI with Other Indicators
RSI works best when combined with other forms of analysis:
- Volume analysis to confirm the signal strength
- Support and resistance levels
- Moving averages for trend confirmation
- Price action patterns
Pro Tip
Our scanner uses RSI(14) as one of its core indicators. Stocks with RSI above 70 combined with other bearish signals receive higher short scores.