RSI Indicator Guide
Master the Relative Strength Index - one of the most powerful momentum indicators for identifying overbought/oversold conditions and divergences
What is RSI?
RSI (Relative Strength Index) is a momentum oscillator developed by J. Welles Wilder in 1978. It measures the speed and magnitude of recent price changes to evaluate overbought or oversold conditions.
RSI oscillates between 0 and 100. Traditionally, readings above 70 indicate overbought conditions (potential selling opportunity), while readings below 30 indicate oversold conditions (potential buying opportunity).
The default setting is 14 periods, meaning RSI calculates based on the last 14 candles (days, hours, etc. depending on your chart timeframe).
RSI Level Interpretation
| RSI Level | Interpretation | Typical Action |
|---|---|---|
| 80-100 | Extremely overbought | Strong sell zone (watch for reversal) |
| 70-80 | Overbought | Caution - potential pullback |
| 50-70 | Bullish momentum | Uptrend - look for long entries |
| 50 | Neutral / Equilibrium | Key pivot level |
| 30-50 | Bearish momentum | Downtrend - look for short entries |
| 20-30 | Oversold | Caution - potential bounce |
| 0-20 | Extremely oversold | Strong buy zone (watch for reversal) |
RSI Settings for Different Styles
RSI (7-9)
Faster, more sensitive
- • Best for scalping
- • More signals (more false ones)
- • Quick overbought/oversold readings
- • Use on 1-15 minute charts
RSI (14)
Standard setting
- • Works for most trading styles
- • Balance of speed and reliability
- • Most widely used setting
- • Use on 1H to daily charts
RSI (21-25)
Slower, smoother
- • Best for swing/position trading
- • Fewer but more reliable signals
- • Better for major turning points
- • Use on daily/weekly charts
RSI Divergence - The Most Powerful Signal
Divergence occurs when price and RSI move in opposite directions. This often precedes major reversals.
Bullish Divergence
- • Price makes lower low
- • RSI makes higher low
- • Indicates weakening selling pressure
- • Often precedes price reversal up
- • Best seen at support levels
Bearish Divergence
- • Price makes higher high
- • RSI makes lower high
- • Indicates weakening buying pressure
- • Often precedes price reversal down
- • Best seen at resistance levels
RSI Trading Strategies
Overbought/Oversold Reversal
Wait for RSI to enter extreme territory (above 70 or below 30), then look for reversal candlestick patterns. Enter when RSI crosses back below 70 (shorts) or above 30 (longs). Works best in ranging markets.
RSI 50-Level Strategy
Use RSI 50 as a trend filter. Only take long trades when RSI is above 50, short trades when below. The 50 level acts as a momentum dividing line between bullish and bearish bias.
Divergence Trading
Identify divergences between price and RSI. Enter on confirmation (price breaking trend line or structure). Place stops beyond the divergence low/high. Target previous swing points.
RSI Range Shifts
In strong uptrends, RSI often oscillates between 40-80 instead of 30-70. In downtrends, it ranges from 20-60. Adjust your overbought/oversold levels based on the trend.
Key RSI Signals
RSI Above 70
Overbought - momentum is strong but may be exhausted. Watch for reversal signals.
RSI Below 30
Oversold - selling may be exhausted. Watch for bounce signals.
RSI Divergence
Price and RSI disagree. Often precedes major reversals.
RSI Crossing 50
Momentum shift. Above 50 = bullish bias, below = bearish.
Failure Swing
RSI fails to make new high/low on retest. Strong reversal signal.
RSI Breakout
RSI breaks its own trendline before price. Early warning signal.
RSI Limitations
RSI is powerful but has important limitations:
Frequently Asked Questions
What is RSI in trading?
RSI (Relative Strength Index) is a momentum oscillator that measures the speed and magnitude of price changes. It ranges from 0-100, with readings above 70 considered overbought and below 30 considered oversold.
What RSI setting should I use?
The default 14-period RSI works well for most trading. Shorter periods (7-9) are more sensitive for scalping. Longer periods (21-25) give smoother signals for swing trading.
Is RSI overbought a sell signal?
Not necessarily. RSI can stay overbought for extended periods in strong uptrends. Overbought shows momentum, not necessarily reversal. Combine with other signals like divergence for better timing.
What is RSI divergence?
RSI divergence occurs when price makes new highs/lows but RSI doesn't confirm. Bullish divergence: price makes lower low, RSI makes higher low. Bearish divergence: price makes higher high, RSI makes lower high.
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Risk Disclosure: Trading involves substantial risk of loss and is not suitable for all investors. This content is for educational purposes only and does not constitute financial advice.
Last updated: December 2025