RSI gets name-dropped in just about every TA cheat sheet. But most people still use it wrong. If you’re relying on that 70-overbought / 30-oversold default without context? You’re trading with training wheels.

Let’s fix that.

What Is RSI, Really?

The Relative Strength Index (RSI) is a momentum oscillator. It measures how fast and how far a price has moved—up or down—over a defined look-back period (default: 14 bars). Values range from 0 to 100.

• Above 70: Typically overbought
• Below 30: Typically oversold
• Around 50: No man’s land

It was developed by J. Welles Wilder back in 1978—same guy who gave us the ADX and Parabolic SAR.

Despite the age, it’s still one of the cleanest ways to spot shifts in buying or selling momentum. You just need to know how to read it right.

How RSI Is Calculated (But Quickly)

RSI = 100 – [100 / (1 + (Average Gain / Average Loss))]

What you need to know:

• Uses average gains vs. losses over the last N periods
• Smoothing is applied after the first calculation to reduce whipsaw
• Result is a plotted oscillator, usually beneath a candlestick chart

Yes, math. No, you don’t need to do it manually. Every platform from TradingView to Thinkorswim has it baked in.

How Traders Actually Use RSI

1. Range Trading? Use It Straight

In sideways markets, the classic overbought/oversold levels work just fine:

• Buy when RSI crosses back above 30
• Sell when RSI crosses back below 70

Just don’t expect RSI to work miracles in a trend. That’s not its turf.

2. Trending Market? Adjust Your Levels

Forget 70/30. They don’t hold up in strong trends.

• Uptrends: RSI bottoms usually form around 40-50
• Downtrends: RSI tops often stall around 50-60

Traders like Constance Brown pushed this idea: adjust your RSI thresholds to fit the trend. Makes a big difference in avoiding fakeouts.

3. Divergences: When RSI Disagrees with Price

RSI divergence is a heads-up that momentum isn’t confirming price action.

• Bullish divergence: Price makes a lower low, RSI makes a higher low
• Bearish divergence: Price makes a higher high, RSI makes a lower high

But be cautious: divergence isn’t a standalone entry signal. Use it to stack your case, not to bet the farm.

RSI Reversals vs Divergences (Subtle, But Useful)

RSI divergence = price moves first
RSI reversal = RSI moves first

• Positive reversal: RSI makes lower lows while price makes higher lows → bullish
• Negative reversal: RSI makes higher highs while price makes lower highs → bearish

These are less common but can be powerful when they align with trend structure.

RSI Swing Rejection: Trend-Following’s Secret Weapon

This is RSI with structure. And structure is king.

Bullish swing rejection (ideal in uptrends):

1. RSI dips below 30
2. RSI pops back above 30
3. RSI pulls back without breaking 30
4. RSI breaks the previous high → buy trigger

Bearish version is the mirror image at 70.

Use this when you want to trade with the trend but still catch favorable entries.

RSI vs. MACD: Same Idea, Different Execution

Both indicators look at momentum. But they do it differently.

Indicator	Measures	Best For
RSI	Speed and change of price	Overbought/oversold levels
MACD	Relationship between 2 EMAs	Trend strength and direction

Use RSI to time entries. Use MACD to confirm the trend. Together, they’re solid.

When RSI Fails (and It Will)

Let’s be honest. RSI has flaws.

• It lags in strong trends
• It can stay overbought/oversold for weeks
• It spits out false reversals regularly if used blindly

This is why RSI should never be your only tool. Use trendlines, moving averages, and price structure to validate what RSI is telling you.

When RSI Actually Works

• In rangebound markets
• As confirmation with other tools (divergence + support zone = stronger case)
• With trend-adjusted thresholds (don’t treat every chart the same)
• When paired with price action (RSI doesn’t trade alone)

Final Word: Context Is Everything

RSI isn’t magic. It’s a signal—not a system. But in the right hands, with the right setup, it tells you exactly what you need: whether momentum is shifting and if the move has room to run.

Use it smart, not static.