Deep Dive Into Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a momentum oscillator developed by J. Welles Wilder Jr. that measures the speed and magnitude of price changes.

Introduction

In the world of trading, timing is everything — and few indicators have stood the test of time like the Relative Strength Index (RSI). Introduced by J. Welles Wilder in 1978, the RSI is a momentum oscillator that helps traders evaluate the strength and speed of price movements. Whether you're trading stocks, forex, or crypto, understanding how RSI is calculated and how to interpret its signals can give you a critical edge.
In this article, we’ll break down exactly how the RSI works, explore its formula, and dive into practical ways you can incorporate it into your trading strategies. From spotting potential reversals to identifying overbought and oversold conditions, the RSI remains a cornerstone of technical analysis — but only if you know how to use it properly.
Let’s explore the mechanics and the mindset behind this powerful indicator.

What Is RSI and How Is It Calculated?

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements over a defined period. It outputs a value between 0 and 100, which helps traders determine whether an asset is overbought or oversold.
The default RSI setting uses a 14-period lookback window and is calculated with the following steps:
🔷Calculate the average gain and loss over the last 14 periods:

Average Gain = Sum of all gains over the past 14 periods / 14
Average Loss = Sum of all losses over the past 14 periods / 14

🔷Compute the Relative Strength (RS):

RS = Average Gain / Average Loss

🔷Apply the RSI formula:

RSI=100−(100/(1+RS))

The result is a single number between 0 and 100 that indicates the asset's momentum.

How to Use RSI in Trading Strategies

⚡️Overbought and Oversold Conditions Strategy

RSI > 70 typically signals that an asset may be overbought and due for a pullback.
RSI < 30 suggests the asset might be oversold, potentially primed for a bounce.

However, these levels aren’t absolute sell or buy signals. In strong trends, RSI can stay overbought or oversold for extended periods.

📈Long Trading Strategy Example:

1. Identify the major trend, to find the long trades it shall be uptrend. On the screen below you can see 1D time frame for .

2. Move to lower time frame (in our case 4h) and find the moment when RSI falls below 30. This is our oversold condition and we are going to look for long trade.

3. Find the local support zone and open long trade.
4. Take profit when price reaches resistance level next to the previous swing high
5. Don’t forget to put initial stop loss when enter position. The best stop loss which will give you 3:1 risk to reward ratio.

📉Short Trading Strategy Example

1. Identify the major trend, to find the short trades it shall be downtrend. On the screen below you can see 1D time frame for .

2. Move to lower time frame (in our case 4h) and find the moment when RSI grows above 70. This is our overbought condition and we are going to look for short trade.

3. Find the local resistance zone and open short trade.
4. Take profit when price reaches support level next to the previous swing low
5. Don’t forget to put initial stop loss when enter position. The best stop loss which will give you 3:1 risk to reward ratio.

⚡️RSI Breakout Strategy

RSI is breaking through 60 indicating bullish momentum shift if the long-term trend is bullish can be the potential long signal
RSI is breaking down 40 indicating bearish momentum shift if the long-term trend is bearish can be the potential short signal

This strategy works great only on the trending market, don’t use it on the range bounded market to avoid whiplashes.

📈Long trading strategy example:

1. Make sure that long-term trend is bullish. Use 200 period EMA as its approximation. If price remains above it we can look for potential long trade setup.
2. If RSI crossed above the level 60 open long trade.
3. Put the initial stop-loss under the signal candle’s low.
4. Take profit when price reached 3:1 risk-to-reward ratio.

📉Short trading strategy example

1. Make sure that long-term trend is bearish. Use 200 period EMA as it’s approximation. If price remains below it we can look for potential short trade setup.
2. If RSI crossed below the level 40 open short trade.
3. Put the initial stop-loss above the signal candle’s high.
4. Take profit when price reached 3:1 risk-to-reward ratio. In our case we received very fast and profitable trade

⚡️RSI Divergence Strategy

RSI can be used also as a trend reversal indicator if we are looking for divergences. This is very reliable sign of current trend weakness and great opportunity open trade against the trend. Usually it’s not recommended, but in case if divergence can be applicable.

Bullish divergence is the situation when price created the lower low, while RSI made the lower low. Usually, it indicates that current downtrend is weakening and we can look for long trades
Bearish divergence is the situation when price created the higher high, while RSI made the lower high. Usually, it indicates that current uptrend is weakening and we can look for short trades

😎Important hint: it’s rarely covered in textbooks about technical analysis, but in our opinion it’s better to used divergences when RSI was able to cross level 50 between two lows/highs.

📈Long trading strategy example

1. Find at the chart situation, when the price made the lower low
2. At the same time RSI shall set the higher low

3. RSI shall break level 50 between these lows indicating shift to the bullish momentum
4. If price failed to set the clean breakdown open long trade on the candle which set the lower low. Put stop loss under it’s low
5. Take profit at 3:1 RR. When you master this concept, you will be able to have much more RR trades, even 10:1. This is possible because when trend finish you have the highest potential upside

📉Short trading strategy example

1. Find at the chart situation, when the price made the higher high
2. At the same time RSI shall set the lower high

3. RSI shall break level 50 between these highs indicating shift to the bearish momentum
4. If price failed to set the clean breakout open short trade on the candle which set the higher high. Put stop loss above it’s high
5. Take profit at 3:1 RR. When you master this concept, you will be able to have much more RR trades, even 10:1. This is possible because when trend finish you have the highest potential upside

Conclusion

The Relative Strength Index (RSI) remains one of the most powerful and flexible tools in a trader’s technical arsenal — but its real value lies in how you use it.
We’ve explored three key RSI strategies:

✅ Overbought/Oversold setups offer simple entry signals in ranging markets, where price tends to revert to the mean.
✅ Breakout strategies unlock RSI’s momentum-tracking potential, helping you ride strong directional moves with confidence.
✅ Divergence detection reveals hidden shifts in market sentiment, giving you an early warning of possible reversals or trend continuations.

Each approach has its strengths — and its risks — but together, they offer a complete framework for using RSI across different market conditions

🔑 Key Takeaways:

RSI is not just a “buy low, sell high” tool — it’s a multi-dimensional indicator that adapts to trends, momentum, and market structure.
The best RSI signals come from confluence: combining RSI with price action, support/resistance, volume, or trend filters like moving averages.
Patience and discipline are essential — RSI signals are only effective when paired with proper risk management and confirmation.

By mastering RSI beyond the basics, you'll be better equipped to make timely, confident, and informed trading decisions — whether you're entering a pullback, chasing a breakout, or spotting the early signs of reversal.

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