RSI 101: Revealing the Special Characteristics of RSIWhy does RSI have support and resistance levels at 40 and 60?
Why does divergence happen between RSI and price?
What is RSI momentum?
All the characteristics of RSI (that I know) will be explained here.
Formula and Meaning
If you are using TradingView, you probably already know what RSI is and what "overbought" and "oversold" mean. So, I won’t repeat it here. Instead, I’ll dive deeper into the true nature of RSI, giving you a different perspective.
You can skip the mathematical formula of RSI, it’s already discussed everywhere online. Just remember this ratio table:
Here’s how I explain the table:
At RSI = 50, the average gain equals the average loss (I'll call this the buy/sell ratio). This is a balanced point. Buyers and sellers are equally strong.
At RSI ~ 60 (66.66), the buy/sell ratio = 2/1. Buyers are twice as strong as sellers.
At RSI ~ 40 (33.33), the buy/sell ratio = 1/2. Sellers are twice as strong as buyers.
At RSI = 80, the buy/sell ratio = 4/1. Buyers are four times stronger.
At RSI = 20, the buy/sell ratio = 1/4. Sellers are four times stronger.
The formula shows that when RSI reaches 80 or 20, the buyer or seller is extremely strong — about four times stronger — confirming a clear trend.
At these levels, some Trading strategies suggest placing a Sell or Buy based on the overbought/oversold idea.
But for me, that’s not the best way. The right approach is: when a trend is clearly formed, we should follow it.
I'll explain why right below.
Look at this chart showing RSI changes with the buy/sell ratio:
When RSI > 50:
When RSI < 50:
You can see that the higher RSI goes, the slower it climbs, but the high buy/sell ratio makes price move up faster.
Similarly, when RSI goes lower, it drops slower but price drops faster.
That’s why at overbought (RSI=80) or oversold (RSI=20) areas, you need to be careful. Even a small RSI moving can lead to big price changes, easily hitting your stop loss.
On the other hand, if you follow the trend and wait for RSI to pull back, you will trade safer and more profitably.
RSI Key Levels
Here are some special RSI levels I personally find useful when observing FX:XAUUSD :
(These levels are relative. They might vary with different timeframes or trading pairs. Check historical data to find the right ones for you. On bigger timeframes like M15 or above, the accuracy is better.)
RSI = 20
When RSI hits 20, sellers dominate. This confirms a trend reversal to bearish.
RSI = 80
When RSI hits 80, buyers dominate. This confirms a trend reversal to bullish.
RSI = 40
This is a sensitive level. Sellers start gaining the upper hand (sell/buy = 2/1).
If buyers lose 40, they lose their advantage.
So RSI >= 40 is "buyer territory". In an uptrend, RSI usually stays above 40.
RSI = 40 acts as support in an uptrend.
RSI = 60
Same idea. RSI <= 60 is "seller territory".
RSI = 60 acts as resistance in a downtrend.
40 and 60 are considered the key levels of RSI.
Now you guys know why RSI has support/resistance around 40/60!
RSI Range
As you know, RSI moves between 0 and 100.
Since RSI >= 40 is buyer territory, we can see the relationship between price and RSI:
When RSI stays above 40, price tends to move in an uptrend:
When RSI stays below 60, price tends to move in a downtrend:
When RSI stays between 40 and 60, buyers and sellers are balanced, and price moves sideways in a box:
When RSI is moving, It creates a RSI Range.
Whenever the trend switches between the three states — uptrend, sideways, and downtrend — a Range Shift is formed.
At first, RSI moves in 40-60 range, price moves sideways. A strong price move pushes RSI to 80. Later, RSI stays above 50, helping price grow strongly. When momentum fades, RSI returns to 40-60 and price moves sideways again.
Note:
RSI reflects Dow Theory by showing the stages of accumulation, growth, and distribution.
And as you see, when RSI touches key levels, the trend often pulls it back.
RSI Momentum
Price momentum means how fast price changes.RSI momentum represents the change in the strength between buying and selling forces.
When RSI > 50:
If price falls, RSI shows high momentum — RSI drops fast but price drops slowly.
If price rises, RSI shows low momentum — RSI rises slowly but price rises fast.
For example, at first RSI is above 50.
Price drops from (a) to (b) by 44 units, RSI drops from (Ra) to (Rb) by 25 units.
Later, RSI drops from (Rb) to (Rc) (also 25 units) but price drops from (b) to (c) by 73 units.
When RSI < 50:
If price falls, RSI has low momentum — RSI drops slowly but price falls fast.
If price rises, RSI has high momentum — RSI rises fast but price rises slowly.
RSI and Price Divergence
Divergence happens when price and RSI move in opposite directions:
Price goes up but RSI goes down, or vice versa.
Why does divergence happen?
In a strong downtrend, price forms a bottom at point (1), and RSI drops to level (r1).
When a price pullback happens, price pushes up to a peak at point (2), and RSI also bounces back to level (r2).
Because the downtrend is strong, after completing the pullback (1-2), price continues to make a lower bottom at point (3).
At this point, remember the behavior of RSI momentum when RSI is below 50:
It takes a large price drop (from 2 to 3) to cause a small RSI drop (from r2 to r3).
Meanwhile, even a small price increase (from 1 to 2) causes a large RSI rise (from r1 to r2).
Since the distance (1-2) is smaller than (2-3), but the RSI move (r1-r2) is bigger than (r2-r3), divergence is created.
Divergence shows that the current trend is very strong, not a complete signal of a trend reversal.
(I might share with you how to spot a complete RSI reversal signal in future posts.)
As shown in the example above, after forming bottom (5) and creating a bullish divergence between (3-5) and (r3-r5), price still kept dropping sharply while RSI kept rising.
In these areas, if you keep trying to catch a reversal just based on divergence, you will likely need to DCA or cut your losses many times.
That’s why the most important thing in trading is always to follow the trend.
RSI Exhaustion
RSI Exhaustion happens when RSI keeps getting rejected by a resistance or support zone and can’t break through.
After a strong downtrend, RSI recovers but stalls around the 5x zone.
It tries many times but fails, showing buying power is weakening.
Then the downtrend continues:
Exhaustion near high or low RSI levels creates stronger divergences than exhaustion in the middle range:
Double or triple tops/bottoms on RSI (M or W shapes) basically indicate RSI exhaustion.
RSI Can Identify Trend Strength
In an uptrend:
If RSI pulls back to a higher level before going up again, the trend is stronger.
The pullback should not fall too deep (below 40).
Example:
First rally: RSI drops to 60 before rising again → strong rally (273 units).
Second rally: RSI drops to 50 before rising again → weaker rally (94 units).
Same idea for a downtrend:
If RSI pullbacks to 50 then drops again, the downtrend is stronger than if it pullbacks to 60.
RSI Support and Resistance
Besides 40-60 acting as support/resistance, RSI also reacts to old tops and bottoms it created.
Why does this happen?
RSI is calculated from closing prices.
On a higher timeframe, the candle close price is a high/low or support/resistance price on lower timeframes.
When RSI moves in a trend on a higher timeframe, it maintains a buy/sell ratio, forcing lower timeframe RSI to oscillate within a range.
Example:
On H4, RSI stays above 40 → uptrend.
It makes H1 RSI move between 30-80.
Sharp RSI tops/bottoms react even stronger because they show strong buying/selling forces.
Summary
When looking at the price chart, we can see that price can rise or fall freely without any defined boundaries.
However, RSI operates differently: it always moves within a fixed range from 0 to 100.
During its movement, RSI forms specific patterns that reflect the behavior of price.
Because RSI has a clear boundary, identifying its characteristics and rules becomes easier compared to analyzing pure price action.
By studying RSI patterns, we can make better assumptions and predict future price trends with higher accuracy.
I have shared with you the core characteristics of RSI, summarized as follows:
Besides overbought (80) and oversold (20), RSI respects 40 and 60.
40 is support level in an uptrend. 60 is resistance level in a downtrend.
In an uptrend, RSI stays above 40.
In a downtrend, RSI stays below 60.
An RSI Range-Shift leads to a trend change.
RSI Divergence shows strong trends.
Double or triple tops/bottoms show RSI exhaustion → potential reversals.
The higher the RSI level, the slower it moves, but the faster the price rises.
The lower the RSI level, the slower it moves, but the faster the price falls.
A strong uptrend can be identified when RSI moves within a higher range or shows continuous bearish divergences.
A strong downtrend can be identified when RSI moves within a lower range or shows continuous bullish divergences.
RSI reacts to its old tops and bottoms.
Sharper RSI peaks show stronger selling.
Sharper RSI bottoms show stronger buying.
In the next parts, I’ll show you how to apply these RSI's Characteristics to trend analysis, multi-timeframe analysis, and trading strategies, that you might have never seen before.
I trade purely with RSI. Follow me for deep dives into RSI-based technical analysis and discussions!
