What Is RSI?
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes. It produces a number between 0 and 100. An RSI above 70 is traditionally considered overbought (the market may have risen too fast). Below 30 is considered oversold (it may have fallen too far).
The standard setting is 14 periods. Shorter periods (7 or 9) make it more sensitive; longer periods (21 or 28) smooth it out.
How to Use RSI
The most common approach: look for buying opportunities when RSI drops below 30 and starts turning back up. Look for selling opportunities when RSI rises above 70 and starts turning down. But there's an important nuance — in strong trends, RSI can stay overbought or oversold for extended periods. A reading of 75 in a strong uptrend doesn't necessarily mean the trend is about to reverse.
RSI works best in ranging markets where price oscillates between support and resistance. In trending markets, use it to identify pullback entries rather than trying to call tops and bottoms.
RSI Divergence
Divergence is one of the most powerful RSI signals. It occurs when price makes a new high but RSI makes a lower high (bearish divergence) — or when price makes a new low but RSI makes a higher low (bullish divergence). This suggests momentum is weakening even though price is still moving, and a reversal may be approaching.
Divergence doesn't tell you exactly when the reversal will happen, but it warns you that the current move is losing energy.
Other Momentum Indicators
Beyond RSI, other popular momentum tools include MACD (Moving Average Convergence Divergence), Stochastic Oscillator, and CCI (Commodity Channel Index). Each measures momentum differently, but the core concept is the same: they help you assess whether a price move still has strength behind it or is running out of steam.
Key Takeaways
- RSI ranges from 0-100; above 70 is overbought, below 30 is oversold
- Most effective in ranging markets — less reliable in strong trends
- RSI divergence warns that momentum is weakening before price reverses
- Use RSI for timing entries within the context of the larger trend
- MACD and Stochastic are complementary momentum tools
