RSI – The Ultimate RSI Indicator Trading Guide

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RSI – The Ultimate RSI Indicator Trading Guide

The Relative Strength Index, or RSI indicator is among the most popular indicators used by traders. The RSI provides information about the strength of the price movements on your charts, hence the name. In this article, we will learn what the RSI really does, how to understand the information it provides and how to use it in our trading.


The introduction – Understanding the RSI indicator

The standard setting for the RSI is 14 periods which means that the RSI evaluates the last 14 candles, or time periods.

The RSI compares the average gain and the average loss and analyses how many of the past 14 candles were bullish versus bearish and it also analyses the candle size of each candle.

For example, if all 14 price candles were bullish, the RSI would be 100 and if all 14 price candles were bearish, the RSI would be 0 (or relatively close to 100 and 0). And an RSI of 50 would mean that 7 past candles were bearish, 7 were bullish and the size of the average gain and loss was equal. The more candles were bullish than bearish, the higher the RSI generally speaking is.


Example 1

The white highlighted area includes the past 14 price candles which the RSI analyzes. Out of those 14 candles, 13 were bullish and only 1 was bearish which resulted in a RSI of 85.

RSI3click to enlarge 


Example 2


Here are 3 more case studies to help us understand the RSI and how it forms:

  1. The first area marks a very bearish period with 9 bearish candles, 4 small bullish candles and 1 Doji. The RSI of this period was 15 which signals a very strong bearish phase because the bears outnumbered the bulls.
  2. The second are includes 9 bullish candles and 5 (mostly small) bearish candles. The RSI of this period was 70 which is a relative strong bullish move because the bulls were in control here.
  3. The third area includes 6 bullish candles, 8 bearish candles and 1 Doji, resulting in an RSI of 34 which signals moderate bearish strength as the balance is equal with just a slight bearish surplus.

As you can see, just by analyzing the 14 candles you would be able to very accurately guess the RSI for a given period. However, using an indicator can still be beneficial because it takes out the guesswork and you can process the data faster.


click to enlarge



Oversold and Overbought – The myth!

The general idea is that when the RSI shows extremely high or extremely low values (higher than 70 or lower than 30), price is said to be oversold or overbought. But, let’s recap what we have just learned to see if this is really true:

A high RSI simply means that there were more bullish candles than bearish candles. And although price can’t go on printing only bullish candles forever, it can be dangerous to believe that just because the RSI shows overbought conditions that the price is likely to reverse. Once we understand what the RSI does, we can see that overbought and oversold and NOT signals that indicate that price will turn.

It’s a myth and it shows misinformation when traders refer to overbought and oversold to define markets which will reverse!


Let’s take a look at some chart studies:

  1. The first scenario shows a period in which the price kept falling for 16 days before the RSI turned back above 30 and left the oversold area. And still there was no rally afterward. A trader who buys such a market just because the RSI is showing oversold conditions will accumulate huge losses.The RSI does NOT provide signals to buy when it is oversold. It simply means that the price is very weak as we have learned above.
  2. During the second period, price kept falling for 8 days when the RSI was oversold and even afterward, the price did not rally. The oversold condition ust confirmed that the chart showed more bearish than bullish candles.



click to enlarge




RSI For Support and Resistance

We have just discovered that the RSI identifies strong trending price movements when it moves at the extremes. And with this knowledge the RSI can be used when it comes to support and resistance and breakout trading. The screenshot below shows with a strong resistance level marked in black. Now let’s observe what happened when price traded into the level.

You can see that price went back to the level several times. During the first time, the RSI showed values of 63 and 57 which meant that although the power was more bullish than bearish, the bulls were not in full control. A strong resistance level does usually not break easily and it requires a strong trend to make it past the price barrier.

The second time price went back to the level, the RSI was at 71, indicating a fairly strong bullish trend, the resistance level held again. It wasn’t until the last time when the RSI showed a value of 76 that the resistance level broke and price held above it with the RSI going all the way to currently 85.



click to enlarge


The RSI can be a useful tool when it comes to quantifying price strength because that is what the RSI does: it analyzes momentum and price strength.


The RSI Divergence

And, finally, another way of using the RSI to identify turning points is by finding divergences. A divergence signals that what price is showing you, is usually not supported by the underlying price dynamics – we will see what this means now.

Let’s follow the price action and we will see how a RSI divergence can be a great way of making sense of trend strength.

First, we see that the downtrend is strong and clearly defined by lower lows and lower highs. The RSI confirms that by showing a lower RSI when it fell from 22 to 18 which means that the downtrend was accelerating.

Then, although price made a new lower low, we can already see that the price wasn’t able to push as low anymore and price just barely broke the previous low. The RSI confirmed that by showing a higher RSI and a value of 38 which means that during the last bearish trend wave, the sellers weren’t as strong.

When the price action and the indicator show opposite signals, we call that a divergence. A divergence can help us understand that trend strength is fading and that one side of market participants are slowly leaving the arena.


Conclusion: Know what price is doing

The RSI is a great tool and although you could easily guess the RSI value by looking at the past 14 candles, plotting the RSI on your charts can add stability and guidance to your trading. If you can quantify price strength and translate it into interpretable numbers, you can make trading decisions more effectively and avoid guesswork and subjective interpretations.

Whether you are using the RSI to identify strength, look for turning points or as a breakout trader, the RSI is your universal weapon.



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Comments ( 36 )

  • Luiz

    Very, very, very good. We had never heard anything like that.

  • John

    Good article! But what about probabilities? I understand your position on price strength or weakness based on the RSI, but it seems that it often indicates a reversal. Do you have any data on the probability of a reversal on an over bought or over sold condition versus a continuation? Thanks!

  • Mit

    You explained it amazingly well and in understandable way. Brilliant. Please keep posting such posts.

  • Nikhil

    This is what doctor ordered…Bravo and Kudos for such a masterpiece

  • Godknows

    This is new to me for two years trading and was wondering why RSI doesn’t pin point overbought oversold on price swings.

  • Srini

    Very interesting and definitely useful. Thanks for the good explanation.

  • Eddy

    Superb. You just cleared my presumptions with this master piece. Would you please write on Stochastic also. I look forward to that.

  • Lazlo_Pozzo

    Wow, this is crisp and clean. This is why I love clean charts.

    On your RSI explanation, I’ve learned something powerful to use. I recently removed my RSI because I never used it in making my decisions. But with a bit of back-testing now, I believe that I will have a good look at my RSI before trades.

  • Murali K

    Its really useful stuff… And nicely explained

  • Chris

    What about the stochastic indicator? Is it also used to measure momentum?
    Can you please write a guide about it or refer me to a place where I can read about it. Thanks

  • John

    Excellent critique along with the charts.

  • Fatclient

    Thank you!

  • Angela Osmond

    Hi, when trading regular divergence, how many candles would you allow between the 2 swing lows for Bullish RD, or the 2 swing highs for Bearish RD?

    • Rolf

      Hello Angela,

      That depends on the chart context. It has to make sense from a price perspective as well. Look at what the price is trying to tell you first and how highs and lows form.


  • Yam

    I will never look RSI the same way again after reading your article. I was one of those that believed that it is oversold or overbought when RSI is at the bottom or top. I did not know how to really use RSI until now. Thanks alot Rolf!

    • Rolf

      Perfect, Yam! That was the goal and I always see traders who do not fully understand their tools. I hope it helps you in your trading

      • Gamvir gurung

        Which time frame its work accurate?

  • Vicky

    Love this. I understand RSI much much better now. Thanks for writing such an informative article.

    • Rolf

      Thanks for reading and leaving a comment, Vicky 🙂

      Glad you found it helpful

  • Harsh

    thank you so much

  • Shawn

    Hi Rolf, thanks for an excellent posting about RSI.
    When you get a chance, please enlighten us about CCI too please.

  • Maha indra

    I’ve loved this blog ever since i’ve read it for the first time. Thanks for your great and simple explanation, sir.

  • Sarabjeet

    Nice article…


  • Anwar

    Thanks for this nice info
    I want to add on this on how I use 2 RSI on the same chart with different time intervals one for example 14 and the other 4-6 days, then watch how this translates to giving more signals on price reversal at lows or highs of the trend with spotting divergence on shorter time frame to confirm the long time frame expected results

  • Srinu kv

    What’s the time frame???

    • Rolf

      It works for any timeframe

  • Rod Johnson

    An excellent explanation, thank you very much. Will be using RSI with a more useful clear picture of price movement now

  • Njoka

    Very good. We had never heard anything like that.

  • Davistrader

    instead of the rsi can i use momentum or adx?

  • Reagan

    I was suggested this your site by some one who left a comment at my blog.this meant i had to check it out
    ….. like thearticlel Thanks!I?ll certainly digg
    it and personally recommend to my friends.
    as you have a Nice blog here!|

  • Anonymous

    thank so much rolf

  • Anonymous

    what is best time frame that we can use rolf

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