4. The Indicator That Promised Too Much

The signal that looked perfect

John Fitzgerald Doe had stopped jumping at every dramatic price move. He observed charts first, marked important levels, and tried to make decisions according to his trading plan. Now he felt ready to understand another tool more deeply.

He added the RSI indicator to his chart. A wavy line appeared beneath the price, along with the familiar 70 and 30 levels. John read that readings above 70 are often described as overbought, while readings below 30 are often called oversold.

“Simple,” he thought. “Above 70, I sell. Below 30, I buy.”

John liked rules that looked clear and easy to follow. The market, however, rarely fits into one simple sentence.

The short that would not work

A stock had been rising for days. The RSI climbed above 70, and John felt he had received the signal he was waiting for. He opened a short position, expecting the price to pull back soon.

For a few minutes, the price moved sideways. John watched the screen with satisfaction, thinking the market might finally be running out of steam.

But the price began to rise again. It reached another high, while the RSI remained in the upper range.

John frowned. “But it’s overbought!”

The price climbed even higher. His position became increasingly uncomfortable, and John had to return to a question he had learned to ask before: was he following what the market was showing, or simply looking for what he had already decided to see?

What does the RSI actually show?

John called Mark, who did not ask where he had entered this time. Instead, he asked what John had wanted the indicator to tell him.

“What does an RSI above 70 mean to you?” Mark asked.

“That the stock is overbought and should fall soon.”

“The RSI provides information about the balance between recent gains and losses. Many traders call readings above 70 overbought, but that alone does not mean price must fall immediately.”

John looked at the chart again. The indicator had not promised a reversal. He had read a promise into it that was never there.

“Then what is it good for?” he asked.

“It can help you understand momentum and can be useful alongside other information. But it does not replace examining the trend, market structure, and risk. A reading below 30 does not automatically mean you should buy, either.”

The other extreme is no magic trick either

That evening, John revisited the Academy lesson on the RSI. The 70 and 30 levels he had memorized no longer looked like two automatic trading buttons.

He thought back to his earlier stories: a high price did not automatically mean a fall was imminent, a break above resistance did not guarantee continuation, and now he had learned that a high RSI did not promise an immediate reversal either.

The next day, another stock’s RSI fell to 28. In the past, John might have immediately looked for a buy. Now he first examined the trend and chart structure. Price was clearly moving down, and he could not see a signal that justified an entry under his own plan.

He did not buy. The price fell further later on.

John did not think he had predicted the future. He had simply avoided opening a trade based on a single indicator reading.

The signal became a question

Over the following weeks, John began using the RSI differently. Instead of asking, “Is it above 70?” he asked, “What does this tell me about momentum, and how does it fit with what price is doing?”

When the RSI was high, he checked whether price was in a strong uptrend. When it was low, he examined whether the downtrend was continuing or whether other signs had appeared that warranted a closer look. No single reading automatically overruled his trading plan.

John also accepted that sometimes the best decision was not to trade. An indicator’s job was not to offer him a trade at any cost. Its job was to help him ask better questions.

When the data began to speak

John started adding specific notes to the Trading Journal for trades where the RSI had influenced his decision. He recorded the trend, the price’s position relative to important zones, the RSI reading, and why he entered or stayed out.

He did not draw sweeping conclusions from a few weeks of data. He knew a handful of trades could easily mislead him. But as the entries accumulated, he no longer had to rely on memory alone.

Over time, he could investigate which situations made the RSI a useful supporting signal in his method, and when it would have misled him if he had treated it as a standalone trigger.

The Academy helped him understand the tool. The Trading Journal helped him examine how it worked in his own practice. Neither promised certain profits—but together they gave him a better foundation for learning.

The lesson behind the story

The RSI is a momentum indicator that provides information about the relationship between recent gains and losses. Readings above 70 are often called overbought, while readings below 30 are often called oversold.

These ranges are not automatic sell or buy signals. The RSI can remain high or low for an extended period, so it is worth interpreting it alongside the trend, price structure, and your own trading plan.

John’s mistake was not using the RSI. It was turning one piece of information into a certain prediction.

Continue learning

The Academy’s lessons on the RSI and trends can help explain how the indicator works and where its limits lie. In the Trading Journal, consider tagging trades that used the RSI so that, after collecting enough data, you can review the situations in which it actually provided useful information for your own method.

Important note

This story is for educational purposes only and does not constitute investment advice. Trading involves the risk of loss. Using the RSI does not guarantee successful trading.