What is RSI in Trading?
The Relative Strength Index (RSI) is a momentum indicator used in technical analysis to measure the speed and change of price movements. It helps traders determine whether a stock, cryptocurrency, or forex pair is overbought or oversold, which can signal potential reversals.
1. Understanding RSI Formula
RSI Calculation:
RSI is calculated using the following formula:
RSI=100−(1001+RS)RSI = 100 – \left( \frac{100}{1 + RS} \right)
Where:
- RS (Relative Strength) = Average Gain / Average Loss
- Average Gain → Sum of gains over N periods ÷ N
- Average Loss → Sum of losses over N periods ÷ N
Default period used is 14 days, but traders can adjust based on strategy.
2. RSI Interpretation
2.1 RSI Above 70 → Overbought
Interpretation:
- The asset is considered overbought, meaning the price has likely risen too far, too fast.
- Buyers are exhausted, and selling pressure may soon increase.
- A trend reversal or pullback is possible.
- It’s a signal to watch for weakness or prepare for a short opportunity—but not a direct “sell” signal without confirmation.
- Stock is rising too fast → Possible price correction.
- Investors may take profits, leading to price decline.
2.2 RSI Below 30 → Oversold
Interpretation:
- The asset is considered oversold, meaning it has likely dropped too far, too quickly.
- Sellers may be exhausted, and buying interest could start building.
- A trend reversal to the upside is possible.
- It’s a signal to watch for bullish confirmation or a potential buying opportunity—especially if supported by other indicators or candlestick patterns.
- Stock is falling too fast → Possible bounce or recovery.
- Buying opportunities emerge due to excess selling pressure.
2.3 RSI Between 30-70 → Neutral
Interpretation:
- When RSI is between 30 and 70, the market is in a balanced state — neither overbought nor oversold.
- There’s no strong momentum in either direction, meaning the price may be:
- Price is moving within normal range.
- Traders look for trend confirmation before acting.
3. Deep Analysis of RSI Conditions
Bullish Signals Using RSI
- RSI crosses above 30 → Signals potential buy opportunity.
- RSI divergence (price falls but RSI rises) → Hidden bullish strength.
- RSI staying above 50 during uptrend → Confirms strong momentum.
Bearish Signals Using RSI
- RSI crosses below 70 → Signals potential sell opportunity.
- RSI divergence (price rises but RSI falls) → Warning of weakening trend.
- RSI staying below 50 during downtrend → Confirms continued selling pressure.
4. RSI Trading Strategies
Basic RSI Trading Approach
- Buy when RSI < 30, sell when RSI > 70.
- Confirm signals with volume analysis.
RSI & Moving Average Combination
- If RSI drops below 30, but price is above the 200 EMA, bullish recovery possible.
- If RSI crosses 70, but price is below 200 EMA, sell signal strengthens.
Divergence Trading
- Bullish Divergence : Price makes lower lows, but RSI makes higher lows → Buy.
- Bearish Divergence : Price makes higher highs, but RSI makes lower highs → Sell.
Bollinger Bands Strategy + RSI
Buy Signal (Bullish Reversal Setup):
- Price touches or closes below the lower Bollinger Band
- RSI is below 30 (oversold)
- Look for a bullish candlestick pattern (e.g., hammer, bullish engulfing)
- Enter long on the next candle confirmation
- verify the volume conformation also
Sell Signal (Bearish Reversal Setup):
- Sell Signal (Bearish Reversal Setup):
- Price touches or closes above the upper Bollinger Band
- RSI is above 70 (overbought)
- Look for a bearish candlestick pattern (e.g., shooting star, bearish engulfing)
- Enter short on the next candle confirmation
- verify the volume conformation also