RSI Explained: How to Find Overbought and Oversold Stocks
The RSI, short for Relative Strength Index, is a score from 0 to 100 that shows how fast a stock's price has risen or fallen over the last 14 trading days. A reading above 70 is called overbought. A reading below 30 is called oversold. Neither word is an instruction to do anything.
"Overbought" sounds like a warning light and "oversold" sounds like a sale sign, so it is tempting to treat the numbers as a trading rule. They describe momentum, and a description is the start of a question, not an answer.
Below: what RSI measures, how to read it, the trap that catches beginners, three ready-made RSI setups in Rapunzl's Stock Scanner, how to put RSI on a chart, and a 15-minute activity for a class.
What does the RSI indicator show?
RSI shows how one-sided recent trading has been. Lots of up days push the score toward 100. Lots of down days push it toward 0. In the Rapunzl library inside the app, RSI is filed under momentum, which means it describes the speed of a move rather than the direction of the long-term trend.
The calculation compares two averages over a look-back window, which is 14 days by default. One is the average size of the up-day gains. The other is the average size of the down-day losses. The ratio of the first to the second is then scaled onto the 0 to 100 line.
Here is a made-up illustration, with numbers chosen only to show the arithmetic. Suppose a stock's up days averaged a gain of 1.5 and its down days averaged a loss of 0.5. The ratio is 3, and the scaled score is 100 minus 100 divided by 4, which is 75. Flip the two numbers and the ratio drops to one third, which scales to 25. The same two numbers in a different order give the opposite reading.
How to read RSI: the 30 and 70 lines
The RSI panel on Rapunzl's charts is fixed to the 0 to 100 range and draws two guide lines, one at 30 and one at 70. The lines split the panel into three zones.
| Zone (illustration) | What recent trading looked like | What it does not tell you |
|---|---|---|
| Above 70 (overbought) | Many strong up days in a row | Whether the climb continues |
| 30 to 70 (middle) | A mix of up and down days | Anything about direction |
| Below 30 (oversold) | Many sharp down days in a row | Whether the fall has finished |
Two other readings matter. One is divergence: if the price makes a new high but RSI does not, the momentum behind the move may be fading. The other is a shifted range. The Rapunzl library suggests ranges of 40 to 80 for a strong uptrend and 20 to 60 for a strong downtrend, in place of the classic 30 and 70 lines.
A shorter look-back makes RSI far more sensitive and jumpy. For classroom work, start with the default of 14, which is also the 14-day RSI behind the Stock Scanner's oversold and overbought ideas.
Why overbought does not mean sell
RSI can sit above 70 for weeks when a stock is in a powerful uptrend. The Rapunzl library puts it plainly: RSI is a momentum reading, not a timing trigger. The Stock Scanner's own "Running hot" card carries the same warning, that over 70 does not mean the price will drop and that strong stocks can stay overbought for weeks.
The same logic runs the other way. A stock can stay oversold for a long time while it keeps falling, so a score below 30 does not mean the drop is over.
That is why RSI works best as a source of questions. A reading above 70 prompts "what has driven this climb, and is the trend behind it healthy?" A reading below 30 prompts "what happened, and has anything changed since?" Asking those questions is the habit to practice. For a wider look at how to teach that habit, see our guide to teaching technical analysis to students, and for the bigger map of chart tools, the overview of technical analysis.
A screen or an indicator is a research starting point. It is never a buy or sell recommendation, and nothing in the simulator or the Stock Scanner is financial advice.
Three RSI setups to try in the Stock Scanner
Rapunzl's Stock Scanner lets students filter stocks by ready-made ideas, then open any result to read about the numbers behind it. It runs on Rapunzl Web, the web app, and three of its ideas are built on RSI.
- Big companies looking oversold. Shows stocks worth $10B or more with an RSI under 30, sorted from the lowest RSI up.
- Bouncing back from oversold. Shows stocks worth $2B or more whose RSI climbed back above 30 in the last 5 trading days. The scanner's own description is that the selling has eased, and its own warning is that bounces often fade.
- Running hot. Shows stocks worth $2B or more with an RSI over 70, sorted from the highest RSI down. This is the overbought list, and the card repeats that over 70 does not mean a drop is coming.
In the filter picker, the two RSI crossovers share one row called "RSI leaves a zone", where you choose between leaving oversold (back above 30) or leaving overbought (back below 70). There is also a mixed idea, "Cheap and oversold", that pairs a low price-to-earnings ratio with an RSI under 35. It shows how a value filter and a chart reading can sit side by side.
New to filters? Start with the walkthrough on how to use a stock screener, then see which fields you can combine in our breakdown of stock scanner filters.
See the same stock on a customized chart
A list is only half the picture. Pick a name from a result and open its chart to see the RSI behind the number.
- Open the chart and choose Customize Chart (the button reads Edit Indicators once a study is on the chart).
- Switch to the Chart Indicators tab and open Basic Indicators.
- Add RSI. It arrives with a period of 14, and the settings can be changed and saved with the Update button.
- Look at the RSI panel under the price chart. It runs from 0 to 100 with guide lines at 30 and 70.
RSI is one of the basic studies, so it is available without Rapunzl Premium. Switching the chart to candlesticks makes the price panel easier to read next to it. Each study also has an Ask the AI Tutor option for a plain-language explanation, and the chart layout syncs between web and mobile.
Two experiments make the lesson stick. First, find the last time RSI crossed above 70 on the stock you picked and note what the price did over the next few weeks. Second, change the period from 14 to a much smaller number and watch the line become jumpier. The second one shows why a setting is a choice, not a fact.
A 15-minute classroom activity: overbought is not a verdict
Goal: students test the claim that an RSI over 70 means a price drop.
Setup: each pair has a device with the Stock Scanner open on Rapunzl Web. Remind students that the stocks are for study, not for trading advice.
- Predict (3 minutes). Each pair finishes this sentence: "A stock with RSI over 70 will probably rise, fall or stall over the next month because ..."
- Find (4 minutes). Pairs open "Running hot", choose one stock from the list and open its chart. They add RSI from Basic Indicators and note the current reading.
- Look back (5 minutes). Pairs scroll back on the chart and find one earlier stretch when RSI was above 70. They record whether the price rose, fell or went sideways afterward, and for roughly how long RSI stayed above 70.
- Share (3 minutes). Each pair reads its prediction and its finding. The class tallies how many stocks dropped, how many kept rising and how many stalled.
Discussion prompts: What does the tally say about using 70 as a sell line? Why might a strong stock stay overbought? What other information would you want before drawing a conclusion?
The tally is the point of the exercise. A mixed result is a fair finding, and it is more useful than a rule that appears to work every time.
Frequently Asked
Questions
RSI stands for Relative Strength Index. It is a score from 0 to 100 that shows how fast a price has risen or fallen over a look-back window, which is 14 days by default.
There is no good or bad number. Under 30 is called oversold, over 70 is called overbought, and the range between is the middle zone. In a strong trend, the Rapunzl library suggests watching 40 to 80 for an uptrend or 20 to 60 for a downtrend.
No. RSI can stay above 70 for weeks in a powerful uptrend, and the Rapunzl library calls it a momentum reading, not a timing trigger. Treat it as a reason to ask what is driving the climb.
Start with 14, the standard setting and the default on Rapunzl's charts. A shorter period makes RSI far more sensitive and jumpy.
Yes. The Stock Scanner has ready-made ideas built on RSI: Big companies looking oversold, Bouncing back from oversold and Running hot. You can also add an RSI filter of your own.
Bring RSI and the Stock Scanner to your classroom
The activity above runs on Rapunzl's Stock Scanner, which is part of the same platform as the real-time simulator and the curriculum.
Request a demo to see the curriculum modules, the simulator and the educator tools. Families can read about Rapunzl at home on the parents page.
By Nate Thomas, School Partnerships Lead at Rapunzl.
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