RSI Indicator Explained: How to Use the Relative Strength Index

The Relative Strength Index (RSI) is one of the most popular and useful indicators in trading. It measures momentum, identifies overbought and oversold conditions, and can signal potential reversals before they happen.

Whether you're a day trader looking for quick momentum shifts or a swing trader hunting for pullback entries, understanding RSI will improve your timing.

This guide explains how RSI works, how to interpret it correctly, and practical strategies you can apply immediately.

What Is RSI?

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of price changes.

Key characteristics:

• Oscillates between 0 and 100
• Created by J. Welles Wilder in 1978
• Default period: 14
• Shows momentum strength, not direction

What RSI tells you:

• How strong recent gains are compared to recent losses
• Whether a stock is potentially overbought or oversold
• Momentum shifts before price confirms them

How RSI Is Calculated

You don't need to calculate RSI manually (your charting platform does it), but understanding the formula helps you interpret the indicator.

The Formula

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RSI = 100 - (100 / (1 + RS))

Where:
RS = Average Gain / Average Loss (over the lookback period)

Step by Step

1. Calculate price changes over the lookback period (default 14)
2. Separate gains (up days) from losses (down days)
3. Calculate average gain and average loss
4. Divide average gain by average loss (RS ratio)
5. Convert to 0-100 scale using the formula

What It Means

• High RSI (70+): Recent gains significantly exceed recent losses
• Low RSI (30-): Recent losses significantly exceed recent gains
• RSI around 50: Gains and losses roughly balanced

The RSI Scale: Key Levels

Traditional Overbought/Oversold

Extreme Levels

The 50 Line

The RSI 50 level is often overlooked but important:

• RSI above 50: Bullish momentum (gains > losses)
• RSI below 50: Bearish momentum (losses > gains)
• RSI crossing 50: Potential momentum shift

Many traders use the 50 line as a trend filter: only take long signals when RSI > 50, only take short signals when RSI < 50.

RSI Overbought and Oversold: The Truth

Here's what most traders get wrong about overbought/oversold:

The Misconception

❌ "RSI above 70 means sell" ❌ "RSI below 30 means buy"

The Reality

✅ Overbought RSI in an uptrend often stays overbought ✅ Oversold RSI in a downtrend often stays oversold ✅ These levels indicate conditions, not automatic signals

Context Matters

In strong uptrends:

• RSI can stay above 70 for weeks
• Pullbacks often only reach 40-50, not 30
• Overbought becomes the "new normal"

In strong downtrends:

• RSI can stay below 30 for weeks
• Bounces often only reach 50-60, not 70
• Oversold becomes the "new normal"

Adjusted Levels for Trends

RSI Divergence: The Powerful Signal

Divergence between RSI and price is one of the most reliable reversal signals.

What Is Divergence?

Divergence occurs when price and RSI move in opposite directions — price makes a new extreme but RSI does not confirm it.

Bearish Divergence (Sell Signal)

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PRICE:  Higher High
RSI:    Lower High

Interpretation: Momentum weakening despite higher prices
Signal: Potential reversal down

How to spot it:

1. Price makes a new high
2. RSI makes a lower high than the previous RSI peak
3. Suggests buying pressure is weakening
4. Often precedes pullbacks or reversals

Bullish Divergence (Buy Signal)

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PRICE:  Lower Low
RSI:    Higher Low

Interpretation: Momentum improving despite lower prices
Signal: Potential reversal up

How to spot it:

1. Price makes a new low
2. RSI makes a higher low than the previous RSI trough
3. Suggests selling pressure is weakening
4. Often precedes bounces or reversals

Hidden Divergence (Trend Continuation)

Hidden divergence signals trend continuation, not reversal:

Hidden Bullish Divergence:

• Price makes higher low (uptrend intact)
• RSI makes lower low
• Signal: Uptrend likely to continue

Hidden Bearish Divergence:

• Price makes lower high (downtrend intact)
• RSI makes higher high
• Signal: Downtrend likely to continue

Divergence Trading Tips

1. Wait for confirmation — Don't trade divergence alone
2. Look for price confirmation — Trendline break, candlestick pattern
3. Higher timeframes are more reliable — Daily divergence > hourly divergence
4. Multiple divergences strengthen signal — Double or triple divergence
5. Divergence can persist — Price can keep trending despite divergence

RSI Settings: Which Period to Use?

Default: 14 Period

The standard setting works well for most applications:

• Balanced between responsiveness and smoothness
• Widely used, so levels are "standard"
• Good for swing trading and position trading

Shorter Periods (7-9)

More sensitive and responsive:

• Reaches overbought/oversold faster
• More signals (but more false signals)
• Better for day trading and scalping
• Use higher thresholds (80/20 instead of 70/30)

Longer Periods (21-25)

Smoother and more reliable:

• Fewer signals but higher quality
• Better for identifying major trend changes
• Good for position trading and investing
• Divergences more significant

Comparison

Which to Choose?

Match RSI period to your trading timeframe:

RSI Trading Strategies

Strategy 1: Oversold Bounce in Uptrend

Buy pullbacks in uptrending stocks when RSI reaches oversold.

Setup:

1. Stock in confirmed uptrend (above 50-day MA)
2. RSI drops to 30-40 zone
3. Price holds support level
4. RSI turns up

Entry: When RSI crosses back above 30 (or 40 in strong trends) Stop: Below recent swing low Target: Previous high or RSI reaching 70

Example:

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AAPL in uptrend, above 50-day MA
RSI drops from 65 to 32
Price holds at 20-day MA support
RSI turns up, crosses 35
Enter long with stop below 20-day MA

Strategy 2: Overbought Rejection in Downtrend

Short rallies in downtrending stocks when RSI reaches overbought.

Setup:

1. Stock in confirmed downtrend (below 50-day MA)
2. RSI rises to 60-70 zone
3. Price hits resistance level
4. RSI turns down

Entry: When RSI crosses back below 70 (or 60 in strong downtrends) Stop: Above recent swing high Target: Previous low or RSI reaching 30

Strategy 3: RSI Divergence Reversal

Trade reversals signaled by RSI divergence.

Bullish Divergence Setup:

1. Price makes lower low
2. RSI makes higher low (divergence)
3. Wait for price confirmation (break above recent high)
4. Enter with stop below the low

Bearish Divergence Setup:

1. Price makes higher high
2. RSI makes lower high (divergence)
3. Wait for price confirmation (break below recent low)
4. Enter short with stop above the high

Strategy 4: RSI 50 Crossover

Use RSI 50 as a trend filter and entry signal.

Bullish:

• RSI crosses above 50 from below
• Confirms shift to bullish momentum
• Entry on pullback that holds above 50

Bearish:

• RSI crosses below 50 from above
• Confirms shift to bearish momentum
• Entry on rally that fails at 50

Strategy 5: RSI Range Trading

Trade RSI bouncing between overbought and oversold in ranging markets.

Setup:

1. Identify range-bound stock (no clear trend)
2. Buy when RSI hits 30 and turns up
3. Sell when RSI hits 70 and turns down
4. Use price support/resistance to confirm

Warning: This strategy fails in trending markets. Only use when price is clearly ranging.

Combining RSI with Other Indicators

RSI works best when combined with other analysis:

RSI + Moving Averages

Strategy:

• Use 50-day MA as trend filter
• Above MA: Only take RSI oversold signals (buy)
• Below MA: Only take RSI overbought signals (sell)

Why it works: Keeps you trading with the trend, not against it.

RSI + Support/Resistance

Strategy:

• Look for RSI oversold at price support
• Look for RSI overbought at price resistance
• Confluence increases probability

Example:

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Stock pulls back to major support at $50
RSI drops to 28 (oversold)
Double confirmation = higher probability long

RSI + Volume

Strategy:

• RSI divergence + declining volume = stronger signal
• RSI oversold + volume spike = potential capitulation
• RSI overbought + volume climax = potential exhaustion

RSI + MACD

Strategy:

• RSI for overbought/oversold conditions
• MACD for trend direction and crossovers
• Both confirming = stronger signal

Example:

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RSI oversold (below 30)
MACD histogram turning positive
Both signals align = buy

RSI + Price Patterns

Strategy:

• RSI divergence + double bottom = strong reversal signal
• RSI overbought + head and shoulders = distribution
• Pattern + RSI = higher conviction

Common RSI Mistakes

Mistake 1: Buying Oversold in Downtrends

Oversold in a downtrend often means "about to get more oversold."

Fix: Only buy oversold RSI when the larger trend is up or at major support.

Mistake 2: Selling Overbought in Uptrends

Overbought in an uptrend is often a sign of strength, not weakness.

Fix: In uptrends, use overbought RSI as a warning to tighten stops, not as a sell signal.

Mistake 3: Trading RSI in Isolation

RSI alone is not a trading system. It's one tool among many.

Fix: Always combine RSI with price action, support/resistance, and trend analysis.

Mistake 4: Ignoring the Trend

RSI signals in the direction of the trend are more reliable than counter-trend signals.

Fix: Filter RSI signals by trend direction. Trade with the trend, not against it.

Mistake 5: Using One Setting for Everything

A 14-period RSI on a daily chart behaves differently than on a 5-minute chart.

Fix: Adjust RSI period to match your timeframe and trading style.

Mistake 6: Acting on First Touch

RSI can hover at extremes. The first touch of 30 or 70 is not always the best entry.

Fix: Wait for RSI to turn (cross back through the level) or for price confirmation.

RSI for Different Timeframes

Day Trading (1-15 minute charts)

Settings:

• RSI period: 7-9
• Overbought: 80
• Oversold: 20

Focus on:

• Quick momentum shifts
• Mean reversion at extremes
• Divergence on 5-15 min charts

Swing Trading (Daily charts)

Settings:

• RSI period: 14
• Overbought: 70
• Oversold: 30

Focus on:

• Trend-following pullback entries
• Divergence at swing highs/lows
• RSI 50 as trend filter

Position Trading (Daily/Weekly charts)

Settings:

• RSI period: 14-21
• Overbought: 70-75
• Oversold: 25-30

Focus on:

• Major trend changes
• Weekly RSI divergence
• Long-term overbought/oversold extremes

Setting RSI Alerts

Don't watch charts all day. Set alerts at key RSI levels.

Alert Ideas

Overbought/Oversold:

• RSI crosses above 70 (overbought warning)
• RSI crosses below 30 (oversold opportunity)
• RSI reaches extreme (above 80 or below 20)

Momentum Shifts:

• RSI crosses above 50 (bullish momentum)
• RSI crosses below 50 (bearish momentum)

Divergence Setup:

• Price at new high + RSI below previous high
• Price at new low + RSI above previous low

With Stock Alarm

Set alerts for RSI conditions on your watchlist:

• Get notified when stocks reach oversold levels
• Track momentum shifts with RSI 50 crosses
• Combine with price alerts for confirmation

Never miss an RSI setup on the stocks you're watching.

Quick Reference: RSI Cheat Sheet

Key Levels

RSI Signals

Rules of Thumb

1. Trend first — RSI signals work best with the trend
2. Context matters — Overbought in uptrend ≠ sell
3. Wait for turn — Don't buy first touch of 30
4. Divergence needs confirmation — Wait for price to confirm
5. Combine indicators — RSI alone is not a system

Frequently Asked Questions

What does RSI 70 and 30 mean?

RSI above 70 is considered overbought, suggesting the stock may be due for a pullback. RSI below 30 is considered oversold, suggesting the stock may be due for a bounce. However, in strong trends, RSI can stay overbought or oversold for extended periods.

What is the best RSI setting?

The default 14-period RSI works well for most traders. Shorter periods (7-9) are more sensitive and better for short-term trading. Longer periods (21-25) are smoother and better for identifying major trend changes. Match the period to your trading timeframe.

What is RSI divergence?

RSI divergence occurs when price makes a new high or low but RSI does not confirm it. Bearish divergence: price makes higher high, RSI makes lower high. Bullish divergence: price makes lower low, RSI makes higher low. Divergences often precede reversals.

Should I buy when RSI is oversold?

Not automatically. Oversold RSI in a downtrend often stays oversold as the stock continues falling. Look for additional confirmation: price holding support, bullish candlestick patterns, or RSI turning up from oversold. Oversold is a condition, not a buy signal by itself.

Can RSI be used for day trading?

Yes. Use shorter RSI periods (7-9) on intraday charts (1-min, 5-min, 15-min). RSI works well for identifying short-term overbought/oversold conditions and momentum shifts. Combine with price action and volume for best results.

Related Articles

Continue building your technical analysis skills:

• Volume Analysis Guide — Learn how volume confirms RSI signals and price moves
• Moving Averages Explained — Combine RSI with trend-following indicators
• How to Read Stock Charts — Master chart reading fundamentals
• Trading Risk Management — Protect your capital with proper position sizing
• Stock Order Types — Execute your RSI signals with the right orders