- What the RSI indicator measures and how it's calculated
- How to identify overbought (>70) and oversold (<30) conditions
- RSI divergences: the most powerful RSI signal for reversals
- Proven RSI trading strategies with entry/exit rules
- Common RSI mistakes and how to avoid false signals
- How to combine RSI with moving averages and support/resistance
What is the RSI Indicator?
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of price changes to identify overbought or oversold conditions.
Developed by: J. Welles Wilder Jr. in 1978 (same creator as the ATR and ADX indicators)
Range: RSI oscillates between 0 and 100
- RSI > 70: Overbought (stock may be due for a pullback)
- RSI < 30: Oversold (stock may be due for a bounce)
- RSI = 50: Neutral (balanced buying and selling pressure)
How RSI is Calculated
RSI measures the ratio of upward price movements to downward price movements over a specific period (default: 14 days):
RSI Formula:
RSI = 100 - (100 / (1 + RS))
Where: RS (Relative Strength) = Average Gain / Average Loss
Calculation:
1. Calculate average gains and losses over 14 periods
2. RS = Average Gain / Average Loss
3. RSI = 100 - (100 / (1 + RS))
Let's say over the last 14 days:
- Average Gain: $2.00 per day
- Average Loss: $1.00 per day
- RS: $2.00 / $1.00 = 2.0
- RSI: 100 - (100 / (1 + 2.0)) = 100 - 33.33 = 66.67
Interpretation: RSI of 66.67 suggests the stock is in strong upward momentum but not yet overbought (would need to exceed 70).
Note: You don't need to calculate RSI manuallyall charting platforms calculate it automatically. Understanding the formula helps you interpret what RSI is actually measuring: the balance between buying and selling pressure.
Overbought and Oversold Signals
Overbought: RSI > 70
When RSI exceeds 70, the stock is considered overbought:
- What it means: Recent gains have been strong and sustainedthe stock may be due for a pullback or consolidation
- Interpretation: Too much buying pressure in too short a time
- Trader action: Consider taking profits, tightening stops, or waiting for a pullback before adding
Warning: Overbought ≠ Sell Signal
In strong uptrends, RSI can stay overbought (>70) for weeks or months. Don't automatically sell just because RSI hits 70. Wait for confirmation (price breaking support, bearish divergence, etc.).
Oversold: RSI < 30
When RSI falls below 30, the stock is considered oversold:
- What it means: Recent losses have been steepthe stock may be due for a bounce or reversal
- Interpretation: Too much selling pressure in too short a time
- Trader action: Watch for reversal signals (bullish candles, support bounces) to enter long positions
Warning: Oversold ≠ Buy Signal
In strong downtrends, RSI can stay oversold (<30) for weeks. Don't catch a falling knife. Wait for confirmation (price breaking above resistance, bullish divergence, volume spike) before buying.
Tesla's RSI exceeded 80 after a massive rally in early 2023:
- Date: January 27, 2023
- Price: $177 (up from $108 in two weeks = +64%)
- RSI: 83 (extremely overbought)
- What happened next: Tesla pulled back to $160 over the next week (-9.6%)
Lesson: Extreme overbought readings (RSI > 80) often precede short-term pullbacks, even in strong uptrends. Traders who took profits near RSI 80 could re-enter at better prices.
RSI Divergences: The Most Powerful RSI Signal
Divergences occur when price and RSI move in opposite directions. These are among the most reliable reversal signals in technical analysis.
1. Bullish Divergence (Reversal Up)
Bullish Divergence Setup:
- Price: Makes a lower low
- RSI: Makes a higher low
- Interpretation: Selling pressure is weakening even as price makes new lows reversal likely
Trading strategy: Wait for price to break above recent resistance + RSI crosses above 30 go long
Apple showed a bullish RSI divergence at the 2022 lows:
- First low (Oct 2022): Price = $138, RSI = 28
- Second low (Dec 2022): Price = $125 (lower), RSI = 32 (higher)
- Signal: Bullish divergence (price made a lower low but RSI made a higher low)
- Outcome: Apple rallied from $125 to $180+ over the next 6 months (+44%)
Key takeaway: Bullish divergences at major support levels are high-probability reversal signals.
2. Bearish Divergence (Reversal Down)
Bearish Divergence Setup:
- Price: Makes a higher high
- RSI: Makes a lower high
- Interpretation: Buying pressure is weakening even as price makes new highs reversal likely
Trading strategy: Wait for price to break below recent support + RSI crosses below 70 go short or sell
Nvidia showed bearish divergence before a pullback:
- First high (May 2024): Price = $950, RSI = 78
- Second high (June 2024): Price = $980 (higher), RSI = 72 (lower)
- Signal: Bearish divergence (price made a higher high but RSI made a lower high)
- Outcome: Nvidia pulled back from $980 to $800 over the next month (-18.4%)
Key takeaway: Bearish divergences near resistance or after strong rallies warn of exhaustion.
Proven RSI Trading Strategies
Strategy 1: RSI Oversold Bounce (Buy the Dip)
Setup:
- Stock is in a confirmed uptrend (price above 50-MA and 200-MA)
- RSI dips below 30 (oversold) during a pullback
Entry Rules:
- Buy signal: RSI crosses back above 30 + price bounces off support level
- Confirmation: Volume spike on the bounce
Exit Rules:
- Stop loss: Below the recent swing low
- Profit target: RSI reaches 70 (overbought) or price hits previous high
Strategy 2: RSI Overbought Fade (Sell the Rip)
Setup:
- Stock is in a downtrend or range-bound (not a strong uptrend)
- RSI exceeds 70 (overbought) on a rally
Entry Rules:
- Short/sell signal: RSI crosses back below 70 + price fails at resistance
- Confirmation: Bearish candlestick pattern (shooting star, engulfing)
Exit Rules:
- Stop loss: Above the recent swing high
- Profit target: RSI reaches 30 (oversold) or price hits next support
Strategy 3: RSI Divergence Reversal
Setup:
- Identify bullish or bearish divergence (see examples above)
- Confirm divergence occurs at a major support or resistance level
Entry Rules:
- Bullish: Enter when price breaks above resistance after bullish divergence
- Bearish: Enter when price breaks below support after bearish divergence
Exit Rules:
- Stop loss: Just beyond the divergence low/high
- Profit target: 2-3x the risk (2:1 or 3:1 reward-to-risk ratio)
Common RSI Mistakes and How to Avoid Them
Top RSI Mistakes:
- ❌ Buying every time RSI hits 30: Oversold doesn't mean "buy now"especially in downtrends.
- Solution: Only buy oversold RSI in confirmed uptrends (price above 50-MA and 200-MA).
- ❌ Selling every time RSI hits 70: In strong uptrends, RSI can stay overbought for weeks.
- Solution: Use RSI > 70 as a warning to tighten stops, not an automatic sell signal.
- ❌ Using RSI in isolation: RSI works best when combined with price action, support/resistance, and volume.
- Solution: Confirm RSI signals with other indicators (moving averages, trendlines, chart patterns).
- ❌ Ignoring the trend: Counter-trend RSI trades (buying oversold in downtrends, selling overbought in uptrends) have low success rates.
- Solution: Trade with the trend: buy oversold in uptrends, sell overbought in downtrends/ranges.
Combining RSI with Other Indicators
RSI + Moving Averages
- Setup: Price above 50-MA + RSI oversold (<30) high-probability dip buy
- Logic: Trend is up (MA confirms), but short-term pullback (RSI confirms)
- Entry: Buy when RSI crosses back above 30 while price holds above 50-MA
RSI + Support/Resistance
- Setup: Price at major support + RSI oversold very strong buy signal
- Logic: Two forms of support (horizontal level + momentum oversold)
- Entry: Buy when price bounces off support AND RSI bounces off 30
RSI + Volume
- Setup: RSI oversold bounce + volume spike institutional buying
- Logic: Heavy volume confirms that the oversold bounce is real (not a weak dead-cat bounce)
- Entry: Buy when RSI crosses above 30 AND volume exceeds 1.5x average
Adjusting RSI Settings
The default RSI period is 14 days, but traders adjust based on their timeframe:
| Trading Style | RSI Period | Overbought/Oversold |
|---|---|---|
| Day Trading | 9-period RSI (faster) | 80 / 20 (wider thresholds) |
| Swing Trading | 14-period RSI (standard) | 70 / 30 (standard) |
| Position Trading | 21-period RSI (slower) | 65 / 35 (tighter thresholds) |
Recommendation: Start with the default 14-period RSI and 70/30 levels. Only adjust after you've mastered the basics.
Action Steps: How to Start Using RSI
- Open TradingView and add RSI to any stock chart (Indicators "RSI")
- Identify the trend: Is the stock in an uptrend, downtrend, or range?
- Look for oversold bounces (<30 cross back above 30) in uptrends
- Look for overbought fades (>70 cross back below 70) in downtrends/ranges
- Scan for divergences: zoom out to 6-12 months and find historical divergences that predicted reversals
- Combine RSI with moving averages: only trade RSI signals when aligned with the trend (above/below 50-MA)
- Backtest: test the "RSI oversold bounce" strategy on 10 stocks over the past year to see if it works
Final Thoughts
RSI is one of the most powerful and widely-used momentum indicators in trading. When used correctlyespecially in combination with trend analysis, support/resistance, and volumeRSI can dramatically improve your entry and exit timing.
The key is to respect the trend. Don't fight strong trends by fading overbought readings in uptrends or buying oversold readings in downtrends. Instead, use RSI to time entries with the trend: buy oversold dips in uptrends, sell overbought rallies in downtrends.
And remember: divergences are your best friend. Bullish and bearish RSI divergences have an exceptional track record of predicting major reversals when they occur at significant support or resistance levels.
Next Steps: Now that you've mastered RSI, learn how to combine it with other momentum tools. Read our guides on Moving Averages and MACD to build a complete technical analysis system.
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