RSI (Relative Strength Index)
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes. It oscillates between 0 and 100, helping traders identify overbought and oversold conditions.
How RSI Works
RSI compares the average gains to average losses over a specified period (default: 14). When recent gains outpace losses, RSI rises above 50. When losses dominate, it falls below 50. The formula normalizes the result to always stay between 0 and 100.
Reading RSI Levels
Key RSI levels:
- Above 70 — Overbought. Price may be overextended and due for a pullback.
- Below 30 — Oversold. Price may be overdone to the downside and due for a bounce.
- 50 Level — The midline. RSI staying above 50 confirms uptrend; below 50 confirms downtrend.
- 80+ — Extremely overbought. Strong momentum but high risk of reversal.
- Below 20 — Extremely oversold. Capitulation selling may be ending.
RSI Divergence
One of the most powerful RSI signals is divergence. Bullish divergence occurs when price makes a lower low but RSI makes a higher low — suggesting selling momentum is weakening. Bearish divergence occurs when price makes a higher high but RSI makes a lower high — suggesting buying momentum is fading.
Warning
RSI can stay overbought or oversold for extended periods during strong trends. An RSI of 80 during a powerful uptrend doesn't necessarily mean you should sell — it means the trend is strong. Use RSI divergence for more reliable signals.
Pro Tip
Adjust RSI periods for different trading styles: use 7-9 for short-term trading (more sensitive) and 21-25 for longer-term analysis (smoother, fewer false signals).
Key Takeaways
- RSI measures momentum on a 0-100 scale (default period: 14)
- Above 70 = overbought, below 30 = oversold
- RSI divergence is one of the most reliable reversal signals
- RSI can stay overbought/oversold for extended periods in strong trends
- The 50 midline helps confirm the overall trend direction