RSI - Relative Strength Index
Type: Momentum Oscillator
The RSI measures the speed and magnitude of recent price changes to assess whether an asset is overbought or oversold. It's one of the most widely used indicators in technical analysis, and one of the most misused.
How it Works
Developed by J. Welles Wilder in 1978, the RSI compares average gains to average losses over a set period — typically 14 candles. The result is plotted as a line that oscillates between 0 and 100.
A high RSI means recent gains have been significantly larger than recent losses. A low RSI means the opposite. The default overbought threshold is 70 and the oversold threshold is 30.
How to Read It
The RSI fluctuates between 0 and 100. Most traders watch three zones: above 70 (overbought), below 30 (oversold), and 30–70 (neutral).
An RSI above 70 does not mean sell immediately. In strong uptrends, RSI can stay above 70 for extended periods. Context matters enormously.
Key Signals
• Overbought (>70): Price may be due for a pullback, but in a strong trend this can persist.
• Oversold (<30): Price may be due for a bounce, but in a strong downtrend this too can persist.
• Centreline cross (50): RSI crossing above 50 signals building bullish momentum; below 50 signals bearish momentum.
• Divergence: Price makes a new high but RSI makes a lower high (bearish divergence) — a potential warning sign of trend weakness.
Limitations
• RSI gives false signals in trending markets — it can sit in overbought/oversold territory for a long time.
• The default 14-period setting suits some timeframes better than others. Shorter periods (7–9) are more sensitive; longer periods (21+) are smoother but slower.
• Divergence signals are powerful but can appear early — price can keep moving against you before reversing.
Trader's Tip: Don't trade RSI signals blindly. Always confirm with trend direction. An oversold RSI in a downtrend is not a buy signal — it's a warning that sellers are in control.