RSI and moving averages explained

How RSI is built

The standard 14-period RSI compares average gains to average losses over the last 14 bars. It is a momentum gauge, not a valuation measure.

Overbought does not mean sell. In a strong uptrend RSI can sit above 70 for weeks, and shorting it is a well-known way to lose money.

Divergence

The more useful RSI signal is divergence: price makes a new high while RSI does not, suggesting the move is running on fumes.

Divergence is early and often wrong on its own. Treat it as a reason to tighten risk, not as an entry.

Simple vs exponential moving averages

An SMA weights every period equally; an EMA weights recent periods more, so it turns faster and whipsaws more.

The 50-day and 200-day averages are watched widely enough to become self-fulfilling support and resistance in large caps.

Crossovers and their limits

A golden cross (50-day crossing above the 200-day) and a death cross (the reverse) are lagging by construction — they confirm a trend that already happened.

In sideways markets, moving-average systems generate a stream of losing signals. Every indicator built on trend fails when there is no trend.

Frequently asked questions

What RSI level means buy?

No level is a buy signal by itself. Below 30 indicates strong recent selling, which may continue.

Which moving average is best?

The 50-day and 200-day are the most widely watched. Shorter averages react faster but produce more false signals.

Do technical indicators work?

They describe momentum and trend, not the future. They work best as risk-management tools alongside fundamental analysis.