RSI Indicator Explained

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of price changes. It ranges from 0 to 100. Values above 70 typically indicate overbought conditions; values below 30 indicate oversold conditions. RSI helps identify potential reversals and confirm trends.

RSI is commonly used in three ways

1. Overbought/oversold: Sell when RSI exceeds 70, buy when it falls below 30. Works best in ranging markets.
2. Divergence: When price makes a new high but RSI does not (bearish divergence), or price makes a new low but RSI does not (bullish divergence), a reversal may be near.
3. Centerline: RSI above 50 suggests bullish momentum; below 50 suggests bearish momentum.

A common mistake is relying on overbought/oversold alone in strong trends. In an uptrend, RSI can stay above 70 for extended periods; in a downtrend, it can stay below 30. Treat overbought/oversold as a warning, not a signal. Always confirm with price action and trend context.

RSI works well with trend indicators (moving averages, ADX) and structure (support/resistance). Use RSI for timing entries when price reaches a key level. Combine RSI divergence with candlestick patterns for stronger reversal signals. Avoid using RSI in isolation.

The default RSI period is 14. Shorter periods (e.g. 7) make RSI more sensitive; longer periods (e.g. 21) smooth it out. Adjust based on your timeframe and strategy.