The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price movements to identify overbought or oversold conditions in an asset. Ranging from 0 to 100, it helps traders spot potential reversals, confirm trend strength, and assess market direction—especially when paired with support and resistance levels.
Developed by J. Welles Wilder Jr. in 1978, RSI is widely used across stocks, forex, crypto, and commodities. This guide explores RSI’s formula, trading signals, strategies, and common pitfalls to help you leverage it effectively.
How is RSI Calculated?
RSI compares average gains and losses over a defined period (typically 14 days) using this formula:
RSI = 100 − [100 / (1 + (Average Gain / Average Loss))]
Key Components:
- Average Gain: Mean of upward price movements.
- Average Loss: Mean of downward price movements.
Adjusting RSI Periods:
| Period Length | Sensitivity | Best For |
|--------------|------------|----------|
| 7–9 | High | Volatile markets (e.g., crypto) |
| 14 (Default) | Moderate | Balanced trading |
| 21–30 | Low | Long-term trends (e.g., commodities) |
👉 Optimize your RSI settings for different markets
How RSI Works in Trading
RSI signals overbought (>70) or oversold (<30) conditions, indicating potential reversals:
📈 Overbought (RSI > 70)
- Signal: Asset may be due for a pullback.
- Action: Consider selling near resistance levels.
📉 Oversold (RSI < 30)
- Signal: Asset may rebound.
- Action: Look for buys near support levels.
Example: If EUR/USD’s RSI hits 80, anticipate a decline; if GBP/USD’s RSI drops to 25, expect a bounce.
RSI Divergence: Spotting Reversals
🔄 Bullish Divergence
- Price: Lower lows.
- RSI: Higher lows.
- Implication: Weak selling momentum → Potential uptrend.
🔄 Bearish Divergence
- Price: Higher highs.
- RSI: Lower highs.
- Implication: Weak buying momentum → Potential downtrend.
RSI Centerline Crossovers
- RSI > 50: Confirms bullish momentum.
- RSI < 50: Confirms bearish momentum.
- Crossover Above 50: Start of uptrend.
- Crossover Below 50: Start of downtrend.
RSI Trading Strategies
1. Overbought/Oversold Signals
- Buy at RSI < 30 (oversold).
- Sell at RSI > 70 (overbought).
2. Divergence Trading
- Bullish divergence: Buy.
- Bearish divergence: Sell.
3. Trend Confirmation
- RSI > 50: Uptrend likely.
- RSI < 50: Downtrend likely.
👉 Master RSI strategies with these pro tips
Best RSI Settings by Market
| Market | Recommended RSI Setting | Use Case |
|-------------|------------------------|-------------------|
| Stocks | 14 | Swing trading |
| Forex | 9 or 14 | Intraday/swing |
| Crypto | 7 or 14 | High volatility |
| Commodities | 10 | Trend confirmation|
Common RSI Mistakes to Avoid
❌ Relying solely on RSI → Combine with MACD or moving averages.
❌ Ignoring trends → RSI works best in ranging markets.
❌ Overlooking divergence → Early reversal signals.
❌ Using default settings blindly → Customize for your strategy.
Pro Tip: Backtest RSI strategies in a demo account first!
FAQs
1. What’s the best RSI setting for day trading?
For forex or crypto, try RSI 7–9 for faster signals.
2. Can RSI predict trend reversals?
Yes! Divergence between price and RSI often signals reversals.
3. Is RSI reliable for long-term investing?
Use RSI 21–30 to filter noise in commodities or stocks.
4. How do I set RSI in MT4?
Go to Insert → Indicators → Oscillators → RSI and adjust periods.
Conclusion
RSI is a versatile tool for identifying overbought/oversold conditions, spotting reversals, and confirming trends. Pair it with other indicators and tailor settings to your market for optimal results.
Ready to test RSI strategies? Start with a demo account to refine your approach!