The Relative Strength Index (RSI) is one of the most popular momentum oscillators. It measures the speed and magnitude of price changes to identify overbought and oversold conditions.
What is RSI?
Definition
RSI:
- Momentum oscillator
- Ranges from 0 to 100
- Measures price momentum
- Created by J. Welles Wilder
Standard Settings
Default:
- 14-period lookback
- Overbought: above 70
- Oversold: below 30
How RSI Works
The Calculation
Simplified:
- Compares average gains vs losses
- Over specified period
- Higher RSI = more gains
- Lower RSI = more losses
Formula: RS = average gain ÷ average loss over 14 periods, smoothed by Wilder's method (prior average × 13 + current value) ÷ 14; RSI = 100 − 100 ÷ (1 + RS).
The Scale
Range:
- 0 to 100
- 50 is centerline
- Above 50 = bullish bias
- Below 50 = bearish bias
RSI Levels
Overbought Zone
Above 70:
- Strong upward momentum
- Potentially overextended
- Watch for reversal
- Not automatic sell
Oversold Zone
Below 30:
- Strong downward momentum
- Potentially overextended
- Watch for reversal
- Not automatic buy
Extreme Levels
Above 80: Extremely overbought
Below 20: Extremely oversold
Centerline (50)
Interpretation:
- Above 50 = bullish
- Below 50 = bearish
- Cross signals momentum shift
RSI Trading Strategies
Basic Overbought/Oversold
The textbook version:
- Sell when RSI > 70
- Buy when RSI < 30
Only half of that survives measurement. In tests for Forex Trading Foundations (ch. 9), across five major pairs and ten years of daily data, buying oversold beats the market's own rate by about +10.6 points and is positive on four of them. Selling overbought averages -3.9 and is positive on one. In a strong uptrend RSI can sit above 70 for weeks, and the measurement says that is the ordinary case rather than the exception.
What to actually do:
- Buy side: RSI below 30 is worth acting on, and better still at a level that already mattered
- Sell side: an RSI reading above 70 is not a sell signal. Take shorts on structure — a rejection at resistance, a failed high — and let the oscillator stay out of it
- Either side: waiting for RSI to leave the zone beats acting inside it
RSI Divergences
Bullish Divergence:
- Price makes lower low
- RSI makes higher low
- Momentum increasing
- Potential reversal up
Bearish Divergence:
- Price makes higher high
- RSI makes lower high
- Momentum decreasing
- Potential reversal down
Centerline Crossover
Bullish Signal: RSI crosses above 50
Bearish Signal: RSI crosses below 50
Use: Trend confirmation
Failure Swings
Bullish Failure Swing:
- RSI falls below 30
- Bounces above 30
- Pulls back but stays above 30
- Breaks above previous high
- Buy signal
Bearish Failure Swing:
- RSI rises above 70
- Falls below 70
- Rallies but stays below 70
- Breaks below previous low
- Sell signal
RSI in Different Markets
Trending Markets
Adjustment:
- Overbought may stay overbought
- Oversold may stay oversold
- Use 80/20 levels
- Focus on divergences
Ranging Markets
Best Performance:
- Traditional 70/30 levels work
- Overbought/oversold effective
- Mean reversion trades
RSI Period Settings
Short Period (5-9)
Characteristics:
- More sensitive
- More signals
- More noise
- Day trading
Standard Period (14)
Characteristics:
- Balanced sensitivity
- Standard default
- Most common
- General purpose
Long Period (20-30)
Characteristics:
- Smoother
- Fewer signals
- Higher reliability
- Longer-term trading
Advanced RSI Techniques
RSI Trendlines
Method:
- Draw trendlines on RSI
- RSI trendline break signals
- Often precedes price breaks
RSI Support/Resistance
Method:
- RSI has its own S/R
- Horizontal levels
- Watch for bounces/breaks
Multiple Timeframe RSI
Strategy:
- Higher TF RSI for bias
- Lower TF RSI for entry
- Alignment gives context, not higher odds
RSI vs Other Oscillators
RSI vs Stochastic
RSI:
- Smoother
- Less sensitive
- Fewer signals
Stochastic:
- More sensitive
- More signals
- Better for ranges
RSI vs CCI
RSI:
- Bounded (0-100)
- Clear zones
- More common
CCI:
- Unbounded
- Can show extreme moves
- More volatility
Common RSI Mistakes
Trading Extreme Only
Mistake: Buying/selling at 30/70 without confirmation
Solution: Wait for reversal signals
Ignoring Trend
Mistake: Shorting overbought in uptrend
Solution: Trade with the trend
Fixed Levels
Mistake: Using 70/30 in all markets
Solution: Adjust for market conditions
Single Timeframe
Mistake: Only checking one timeframe
Solution: Use multiple timeframes
RSI Trading Checklist
Before Entry
- [ ] RSI signal present
- [ ] Trend direction considered
- [ ] Divergence checked
- [ ] Confirmation present
- [ ] Stop loss defined
- [ ] Target identified
Combining RSI
RSI + Moving Average
Strategy:
- MA for trend direction
- RSI for entry timing
- Trade RSI signals in MA trend direction
RSI + Support/Resistance
Strategy:
- S/R for key levels
- RSI for momentum
- Oversold at support = buy
RSI + Price Action
Strategy:
- Candlestick patterns
- RSI confirmation
- Higher probability entries
Key Takeaways
- RSI measures momentum on 0-100 scale
- Above 70 = overbought, below 30 = oversold
- Divergences signal potential reversals
- 14-period is standard setting
- Don't trade extremes blindly
- RSI can stay above 70 for weeks in a trend; in tests only the oversold buy side held up
- Combine with other analysis
- Adjust levels for trending markets
What's Next?
Learn about MACD, combining moving averages for trend and momentum analysis.
This article is for educational purposes only and does not constitute financial advice.