What is RSI?
The Relative Strength Index (RSI) is one of the most fundamental oscillator-type technical analysis indicators used by traders and investors. Developed by American analyst J.W. Wilder, it measures the magnitude of recent price movements to evaluate overbought or oversold conditions in a market.
RSI calculates the ratio of upward and downward price movements over a specified period (typically 14 days), presenting values between 0% and 100%.
Key characteristics:
- Overbought zone: RSI ≥ 70–80%
- Oversold zone: RSI ≤ 20–30%
- Neutral zone: 30–70%
RSI Calculation Formula
- A: Sum of upward price changes over n days
- B: Sum of downward price changes over n days
RSI = 100 – (100 / (1 + (A / B)))
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Basic RSI Applications
Overbought/Oversold Signals:
- Sell when RSI exits the overbought zone (falls below 70%).
- Buy when RSI exits the oversold zone (rises above 30%).
Limitations:
- False signals during strong trends (RSI may stay extended in overbought/oversold zones).
- Works best in ranging markets; less reliable in trending environments.
Advanced RSI Strategy: Divergence
Divergence occurs when price and RSI move in opposite directions, signaling potential trend reversals:
- Bearish Divergence: Price makes higher highs, but RSI makes lower highs → Sell signal.
- Bullish Divergence: Price makes lower lows, but RSI makes higher lows → Buy signal.
Example: Bitcoin’s daily chart showed bearish divergence before a 15% correction in Q1 2023.
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Gauging Trend Strength with RSI
- Strong Uptrend: RSI sustains above 50% (may hover near 80%).
- Strong Downtrend: RSI sustains below 50% (may hover near 20%).
Pro Tip: Avoid counter-trend trades during extended RSI plateaus—wait for confirmation (e.g., break of key support/resistance).
FAQs
1. What’s the best timeframe for RSI?
RSI is commonly calculated over 14 periods, but shorter periods (e.g., 7) increase sensitivity, while longer ones (e.g., 21) reduce noise.
2. Can RSI be used alone?
No. Combine it with:
- Trendlines
- Moving Averages
- Volume Analysis
3. How reliable is divergence?
Divergence suggests reversals but requires confirmation (e.g., candlestick patterns or MACD cross).
4. Why does RSI fail in strong trends?
In parabolic trends, RSI can stay overbought/oversold for extended periods due to its 0–100% range limitation.
5. What alternatives complement RSI?
- CMO (Chande Momentum Oscillator)
- MACD (Moving Average Convergence Divergence)
This guide simplifies RSI for actionable trading. For further study, explore Elliott Wave Theory or momentum indicators like CMO.
**Notes**: