RSI Indicator Explained

The Relative Strength Index (RSI) is one of the most popular technical indicators in trading. In this guide, we explain how it works and how to use it.

What Is The RSI?

The RSI is a momentum oscillator that measures the speed and movement of price changes. It oscillates between 0 and 100. When the RSI is above 70, the market is considered overbought. Below 30, the market is oversold.

How To Use The RSI?

1. Overbought and Oversold

When the RSI moves above 70, this may indicate a potential downward correction. Below 30, it may signal a potential bounce up.

2. Divergence

Divergence occurs when price makes a new high, but the RSI does not. This can indicate a possible trend reversal.

3. RSI in Trending Markets

In a strong trend, the RSI can stay above 70 or below 30 for a long time. Do not use the RSI as your only signal.

RSI Settings

The default setting is 14 periods. For shorter timeframes you can use 9 periods, for longer ones 21.

Common Mistakes

• Blindly following the RSI without other indicators
• Opening positions as soon as RSI hits 70 or 30
• Using the RSI in a strong trend without confirmation

Conclusion

The RSI is a powerful indicator, but it works best combined with other tools. Use it to identify potential turning points, but always wait for confirmation.