What it actually computesWilder's Relative Strength Index, in full:
RS = (smoothed average gain over N) / (smoothed average loss over N)
RSI = 100 - 100 / (1 + RS)
Two details matter more than the formula itself.
The "average" is not an average. Wilder used his own smoothing - an exponential filter with alpha = 1/N, not a simple mean of the last N bars.
The inputs are close-to-close changes. Nothing else enters. Not the high, not the low, not the volume, not the order of events inside the bar.
So RSI is a smoothed ratio of recent up-closes to recent down-closes, squashed onto a 0-100 scale. That is the entire content. Everything an RSI can tell you is already in the sequence of closes; the indicator is a compression of that sequence, not an addition to it.
"Overbought" means the security has been going upStrip the vocabulary away. A high RSI is a statement that recent closes have risen more than they have fallen, smoothed. That is it. There is no mechanism inside the formula that makes a high reading imply a coming reversal, and nothing in the arithmetic that knows what "too far" means.
If someone tells you RSI over 70 means a security is due to fall, ask what in the formula produces the word "due". There isn't anything. The claim may still be true for some instrument in some regime - but it is not a property of the indicator, and it has to be demonstrated separately every time.
Excerpt from Teardown No. 1 (RSI). Every issue follows the same pattern: what the tool computes, what follows from the arithmetic, and where it misleads.