The Relative Strength Index (RSI) is one of the most popular technical indicators in trading. Developed by J. Welles Wilder in 1978, it measures the speed and magnitude of price changes to identify overbought and oversold conditions — and much more. Here's how to use it properly.

How RSI is calculated

RSI compares average gains to average losses over a set period (default: 14 periods) and plots the result on a 0–100 scale. Formula: RSI = 100 – (100 / (1 + RS)), where RS = Average Gain / Average Loss over the period.

RSI above 70: traditionally interpreted as overbought — the asset may be due for a pullback. RSI below 30: traditionally interpreted as oversold — the asset may be due for a bounce. The 50 level acts as a trend filter: RSI above 50 favours bullish bias; below 50 favours bearish bias.

The overbought/oversold trap

The most common RSI mistake: selling just because RSI is above 70 or buying just because it's below 30. In a strong uptrend, RSI can stay above 70 for extended periods as price continues rising. Shorting a strongly trending asset because RSI is 'overbought' is one of the fastest ways to blow up a trading account.

Better approach: in an uptrend, use RSI pullbacks to 40–50 (not reaching oversold) as buy opportunities. In a downtrend, use RSI bounces to 50–60 as sell/short opportunities.

RSI divergence: the most powerful signal

Divergence occurs when price and RSI disagree. Bearish divergence: price makes a higher high, but RSI makes a lower high — momentum is weakening as price rises. This often precedes reversals. Bullish divergence: price makes a lower low, but RSI makes a higher low — selling pressure is decreasing even as price falls. This often precedes rallies.

Divergence is most reliable when found at key support/resistance levels and on higher timeframes (4-hour, daily). On 1-minute charts, divergence signals are unreliable.

RSI settings for different trading styles

Default setting (14 periods) works well for most swing trading applications. For day trading (more sensitive): use RSI 7 or RSI 9 — reacts faster, generates more signals, more false signals. For longer-term investing (less sensitive): use RSI 21 or RSI 25 — fewer but higher-quality signals. For crypto (higher volatility): adjust the overbought/oversold thresholds. Crypto often reaches RSI 80+ without reversing immediately — consider using 80/20 as your thresholds instead of 70/30.

Frequently Asked Questions

What RSI level should I buy at? +
There's no single answer. Rather than buying purely on RSI level, combine RSI signals with price structure. An RSI bounce from 30 at a key support level is much more meaningful than RSI at 30 in a free-falling downtrend.
Is RSI better than MACD? +
RSI and MACD measure different things. RSI measures momentum relative to recent price action. MACD measures the relationship between two moving averages. Both have value — most traders use them together for confirmation rather than choosing one over the other.