RSI — Relative Strength Index
The RSI is a momentum oscillator that measures the speed and magnitude of price movements. It oscillates between 0 and 100, helping traders identify when an asset may be overbought or oversold.
What is RSI?
Developed by J. Welles Wilder Jr. in 1978, the Relative Strength Index (RSI) compares the magnitude of recent gains to recent losses to determine if an asset is overbought or oversold. It's one of the most widely used momentum indicators in technical analysis.
The RSI value ranges from 0 to 100. Traditionally, readings above 70 indicate overbought conditions (potential sell signal), while readings below 30 suggest oversold conditions (potential buy signal).
How RSI Works
The RSI calculation involves comparing average gains to average losses over a specified period (typically 14 periods). The formula produces a value that oscillates between 0 and 100.
Step 1: Calculate price changes for each period
Step 2: Separate gains and losses
Step 3: Calculate average gain and average loss
Step 4: Apply the RSI formula
Overbought & Oversold Signals
Overbought (RSI > 70)
When RSI rises above 70, the asset may be overbought. This suggests buying pressure has pushed prices too high, too fast—a potential reversal or pullback may be coming.
- • Wait for RSI to cross back below 70
- • Look for bearish candlestick patterns
- • Consider taking profits on longs
Oversold (RSI < 30)
When RSI falls below 30, the asset may be oversold. This indicates selling pressure has driven prices too low—a potential bounce or reversal may occur.
- • Wait for RSI to cross back above 30
- • Look for bullish candlestick patterns
- • Consider entering long positions
RSI Divergence
Divergence occurs when price and RSI move in opposite directions. This is often a powerful signal that the current trend may be losing momentum and a reversal could be approaching.
Bullish Divergence
Price makes a lower low, but RSI makes a higher low. This suggests selling pressure is weakening and buyers may step in.
Bearish Divergence
Price makes a higher high, but RSI makes a lower high. This suggests buying pressure is fading and sellers may take control.
Trading Strategies
Centerline Crossover Strategy
Trade based on RSI crossing the 50 level. Above 50 indicates bullish momentum, below 50 indicates bearish momentum.
- • Buy: RSI crosses above 50 from below
- • Sell: RSI crosses below 50 from above
- • Works best in trending markets
Failure Swing Pattern
A failure swing is a confirmed reversal signal that doesn't depend on divergence with price. It's considered more reliable than simple overbought/oversold signals.
- • Bullish: RSI drops below 30, bounces, pulls back (stays above 30), then breaks higher
- • Bearish: RSI rises above 70, drops, rallies (stays below 70), then breaks lower
Optimal RSI Settings
| Trading Style | Period | Levels | Notes |
|---|---|---|---|
| Day Trading | 7-9 | 20/80 | More signals, more false positives |
| Swing Trading | 14 | 30/70 | Default setting, balanced |
| Position Trading | 21-25 | 30/70 | Smoother, fewer signals |
| Scalping | 5-7 | 10/90 | Extreme levels only |
Combine RSI with Other Indicators
RSI works best when combined with trend indicators like Moving Averages or MACD. This helps filter false signals and confirm trade setups.
Frequently Asked Questions
What is RSI and what does it measure?
RSI (Relative Strength Index) is a momentum oscillator that measures the speed and magnitude of price changes. It oscillates between 0 and 100 and helps identify when an asset may be overbought (often above 70) or oversold (often below 30).
What RSI level is considered overbought or oversold?
Traditional levels are 70 for overbought and 30 for oversold. In strong trends, traders sometimes use 80/20 to filter weaker signals. No level guarantees a reversal—RSI can stay overbought or oversold for extended periods.
What is RSI divergence and why does it matter?
Divergence occurs when price makes a new high or low but RSI does not. Bullish divergence (price lower low, RSI higher low) can signal weakening selling pressure; bearish divergence (price higher high, RSI lower high) can signal weakening buying pressure. It often precedes reversals but should be confirmed.
What is the best RSI period setting?
The default 14-period works well for most cases. Shorter periods (e.g. 7) react faster but produce more noise; longer periods (e.g. 21–25) are smoother and suit position trading. Backtest on your market and timeframe.
Can RSI be used alone for trading?
RSI works best combined with trend or volume context. Using it with moving averages or MACD helps filter false signals. RSI in an uptrend is more reliable when buying oversold bounces; in a downtrend, selling overbought bounces.