What Is the RSI Indicator?
The RSI or Relative Strength Index is a technical indicator used in financial markets to measure price momentum. Developed by J.
Welles Wilder in 1978, it has become one of the most widely used tools by traders and analysts to identify overbought and oversold conditions in various assets. It is an essential part of any RSI trading strategy.
How Does the RSI Work?
RSI is displayed as a line that moves between values 0 and 100. The basic interpretation is:
RSI above 70 → Asset is considered Overbought.
RSI below 30 → Asset is considered Oversold.
These thresholds don’t guarantee immediate reversals but highlight the potential for a correction or a trend change. These are known as Overbought and Oversold levels.
How to Use RSI in Trading
Identifying Entry and Exit Points:
Traders use RSI to time their buys and sells.
Example:
RSI below 30 and starting to rise → Potential buy signal.
RSI above 70 and starting to fall → Potential sell signal.
Trend Confirmation:
RSI helps confirm the broader market trend. If the indicator moves in sync with price action, it adds credibility to the trend. That's why it's also used as a Momentum indicator for trading.
Detecting Divergences:
One of the strongest RSI signals is divergence, which occurs when price moves in one direction while RSI moves in the opposite, often signaling a possible trend reversal. This is known as Divergence in RSI.
Types of RSI Divergences
Bullish Divergence:
Price makes lower lows, but RSI makes higher lows → Possible upward reversal.Bearish Divergence:
Price makes higher highs, but RSI makes lower highs → Possible downward reversal.
Best RSI Settings
The most common setting is 14 periods, known as the RSI 14 setting.
Shorter settings (7 or 9) make RSI more sensitive.
Longer settings (21 or 28) smooth out the signal.
The ideal setting depends on your trading style: scalping, day trading, swing trading, or long-term investing.
Pro Tips for Using RSI
Don’t rely solely on RSI. Combine it with other tools like MACD or moving averages for higher accuracy.
Avoid reacting instantly to RSI hitting 30 or 70—wait for price confirmation or reversal patterns.
During strong trends, RSI may remain in overbought or oversold zones for extended periods—be cautious.
Conclusion:
The RSI is one of the most powerful technical indicators available, helping traders understand market momentum and spot potential opportunities.
However, to use it effectively, you need a solid understanding and a combination with other tools for better decision-making. Mastering RSI will definitely level up your RSI trading strategy.
