RSI Indicator Guide: Measuring Market Momentum

The Relative Strength Index (RSI) is a momentum oscillator developed by J. Welles Wilder. It measures the speed and magnitude of price changes, oscillating between 0 and 100.

How RSI Works

The RSI calculates the ratio of recent gains to recent losses over a specific period (default: 14 periods).

• RSI > 70: The market is considered overbought (potentially overextended to the upside).
• RSI < 30: The market is considered oversold (potentially overextended to the downside).
• RSI = 50: Neutral momentum.

Key RSI Strategies

1. Overbought/Oversold Reversals

The simplest RSI strategy:

• RSI drops below 30, then crosses back above 30: Buy signal.
• RSI rises above 70, then crosses back below 70: Sell signal.

2. RSI Centerline Crossover

• RSI crosses above 50: Bullish momentum is gaining strength.
• RSI crosses below 50: Bearish momentum is gaining strength.

Use the 50-level as a trend filter: only take buy signals when RSI is above 50, and sell signals when RSI is below 50.

3. RSI Divergence (Most Powerful)

Bullish Divergence:

• Price makes a lower low.
• RSI makes a higher low.
• Signals weakening downward momentum → potential reversal upward.

Bearish Divergence:

• Price makes a higher high.
• RSI makes a lower high.
• Signals weakening upward momentum → potential reversal downward.

Hidden Divergence (Trend Continuation):

• Hidden Bullish: Price makes a higher low, RSI makes a lower low → trend continues up.
• Hidden Bearish: Price makes a lower high, RSI makes a higher high → trend continues down.

4. RSI Trendlines

You can draw trendlines directly on the RSI indicator:

• When the RSI breaks its own trendline, it often precedes a price breakout.
• This technique can give you an early warning signal before the actual price breaks.

Adjusted RSI Levels for Trending Markets

In strong uptrends, RSI often stays between 40-80. In strong downtrends, it stays between 20-60. Adjust your levels accordingly.

RSI Settings

Common Mistakes

1. Selling only because RSI is overbought. In strong trends, overbought conditions can persist for weeks.
2. Ignoring divergence. Divergence is the RSI's most valuable feature — always watch for it at key levels.
3. Using RSI in isolation. Combine with price action, support/resistance, and other confluence factors.

The RSI is simple to learn but takes time to master. Focus on divergence and the centerline crossover — they will serve you well.