The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes.
How RSI Works
| Element | Value |
|---|---|
| Range | 0 to 100 |
| Overbought | Above 70 |
| Oversold | Below 30 |
| Period | 14 (default) |
| Middle line | 50 |
RSI = 100 - (100 / (1 + RS)) Where RS = average gain / average loss over 14 periods.
How to Read RSI
| RSI Level | Meaning |
|---|---|
| Above 70 | Overbought — price may pull back |
| Below 30 | Oversold — price may bounce |
| 50 | Neutral — no clear direction |
| 30-70 | Normal range — trend is intact |
| Above 80 (extreme) | Strong trend, possible reversal soon |
| Below 20 (extreme) | Strong trend, possible bounce soon |
Basic RSI Strategies
| Strategy | Action |
|---|---|
| Overbought sell | RSI > 70, look for short entry |
| Oversold buy | RSI < 30, look for long entry |
| RSI trend | RSI above 50 = uptrend, below 50 = downtrend |
| RSI centerline cross | Buy when RSI crosses above 50, sell when below |
RSI Divergence
Divergence is one of the most powerful RSI signals:
| Type | Price | RSI | Signal |
|---|---|---|---|
| Bullish divergence | Lower low | Higher low | Trend reversal up |
| Bearish divergence | Higher high | Lower high | Trend reversal down |
Bullish Divergence
Price makes a lower low but RSI makes a higher low. Momentum is weakening to the downside — a reversal up is likely.
Bearish Divergence
Price makes a higher high but RSI makes a lower high. Momentum is weakening to the upside — a reversal down is likely.
RSI Settings
| Period | Use Case |
|---|---|
| 14 (default) | General purpose |
| 7-9 | Short-term, more signals |
| 20-30 | Long-term, fewer signals |
Shorter periods produce more signals (and more false signals). Longer periods are more reliable but slower.
RSI in Trending Markets
| Trend | RSI Behaviour |
|---|---|
| Strong uptrend | RSI stays above 40-50 even on pullbacks |
| Strong downtrend | RSI stays below 50-60 even on rallies |
In strong trends, overbought/oversold signals are less reliable.
RSI vs Other Oscillators
| Indicator | Best For |
|---|---|
| RSI | Momentum + overbought/oversold |
| Stochastic | Entry timing in ranges |
| MACD | Trend direction + momentum |
| CCI | Cyclical turning points |
Common Mistakes
| Mistake | Why |
|---|---|
| Trading every overbought/oversold signal | In trends, RSI can stay extreme |
| Ignoring divergence | One of RSI’s strongest signals |
| Using RSI alone | Best combined with support/resistance |
| Default settings for all assets | Adjust period based on volatility |
Bottom Line
RSI measures momentum on a scale of 0-100. Above 70 is overbought, below 30 is oversold. Divergence between price and RSI is a powerful reversal signal. In strong trends, RSI can stay overbought or oversold for extended periods. Combine RSI with support and resistance levels for the best results. Default is 14 periods — adjust for your timeframe.
Why RSI alone is not enough
New traders often discover RSI and start buying every oversold reading and selling every overbought one. The result is a string of small losses that slowly erodes capital. RSI is a momentum tool, not a complete strategy. Its signals are most reliable when placed in context — the broader trend, nearby support and resistance, and the market environment at the time.
In a range-bound market, overbought and oversold readings work reasonably well because price oscillates between defined boundaries. In a trending market, however, RSI can pin above 70 or below 30 for weeks. Traders who short every time RSI crosses 70 during a strong uptrend are fighting the trend, which is one of the most expensive mistakes in technical analysis. The better approach is to use RSI to confirm what the chart is already telling you: look for divergence near key support or resistance, watch the centreline cross to gauge trend strength, and always ask whether the broader market context supports the signal.
The 14-period default is a starting point, not a rule. Highly volatile assets may respond better to a shorter period like 7 or 9, which produces more signals but also more noise. Slower, less volatile assets may benefit from 20 or 30 periods, smoothing out fluctuations at the cost of fewer entries. Experiment on historical data before committing real capital, and remember that any setting that works brilliantly on one asset will underperform on another. RSI is a lens for reading momentum — the trader still has to interpret what the picture means.
Wrapping up
RSI is one of the most widely used oscillators for a reason: it is simple, versatile, and effective when combined with sound chart analysis. The 14-period default gives a reliable baseline, divergence offers some of the clearest reversal warnings the indicator produces, and the centreline can confirm trend direction in a single glance. But no indicator operates in a vacuum. RSI’s true value emerges when it is layered on top of trend analysis, support and resistance zones, and disciplined risk management. Keep the settings appropriate to your timeframe, watch for divergence at turning points, and treat overbought and oversold as context clues rather than automatic trade signals.