RSI
Key Takeaways
- 01.A momentum oscillator bounded between 0 and 100.
- 02.RSI > 70 is traditionally overbought, and RSI < 30 is oversold.
- 03.Divergences between price and RSI highs/lows signal potential trend reversals.
- 04.RSI midline (50) acts as a separator of bullish (above 50) and bearish (below 50) regimes.
Why it matters
RSI helps traders gauge the strength of a trend. It prevents buying into overextended trends or selling at the absolute bottom of a panic. It is also highly valued for spotting momentum divergence, which is one of the most reliable leading indicators of trend exhaustion.
When it matters
It is most effective in trading ranges or broad channels. During strong, trending markets, RSI can remain overbought or oversold for extended periods, making simple threshold strategies highly risky.
A sub-chart indicator panel showing the RSI line oscillating between 0 and 100, with horizontal lines at 30 and 70.
Toggle the RSI indicator on the chart panel to view current levels and detect potential overbought or oversold conditions.
Common Mistakes
Selling immediately when RSI crosses 70
In a strong bull market, RSI can stay overbought (> 70) for weeks. Shorting immediately upon crossing 70 will lead to heavy losses in a runaway uptrend. The reversal is confirmed when RSI crosses back below 70, not when it rises above it.
Ignoring market context
Applying oversold RSI buy signals in a secular bear market or overbought sell signals in a secular bull market leads to trading against the primary trend.
📖 Real-World Example: Divergence at a market peak
In late 2021, a leading index made a new high at $16,000. However, the RSI peak associated with this price high was significantly lower than the RSI peak of the previous month's high. This bearish divergence showed slowing momentum, and preceded a 20% correction.