RSI (Relative Strength Index) is a momentum oscillator that measures the speed and magnitude of recent price changes on a scale of 0 to 100. Developed by J. Welles Wilder, RSI identifies overbought conditions (above 70) and oversold conditions (below 30), helping traders anticipate potential reversals or continuations.
- Oscillates between 0-100
- Above 70 = overbought; Below 30 = oversold
- Divergences signal potential reversals
How RSI Works
RSI calculates the ratio of up moves to down moves:
RSI Formula:
RSI = 100 - (100 / (1 + RS))
Where RS = Average Gain / Average Loss
Over 14 periods (standard)
Example:
Last 14 days:
Up days: +2%, +1.5%, +3%, +1%, +2.5% (avg = 2%)
Down days: -1%, -0.5%, -1.5%, -1%, -0.8% (avg = 0.96%)
RS = 2 / 0.96 = 2.08
RSI = 100 - (100 / 3.08) = 67.5
Interpretation: Getting overbought, watch for resistance
Quick Reference: RSI Zones
| RSI Range | Condition | Typical Action |
|---|---|---|
| 80-100 | Extremely overbought | Strong sell zone |
| 70-80 | Overbought | Consider selling |
| 50-70 | Bullish momentum | Hold longs |
| 30-50 | Bearish momentum | Hold shorts |
| 20-30 | Oversold | Consider buying |
| 0-20 | Extremely oversold | Strong buy zone |
Example: RSI Trade Setup
RSI Oversold Bounce:
| Day | Price | RSI | Action |
|---|---|---|---|
| 1 | ₹110 | 65 | Neutral |
| 2 | ₹105 | 48 | Weakening |
| 3 | ₹98 | 32 | Approaching oversold |
| 4 | ₹95 | 25 | Oversold! Watch for bounce |
| 5 | ₹97 | 35 | RSI turning up, BUY |
| 6 | ₹102 | 52 | Position profitable |
RSI measures momentum on a 0-100 scale. Above 70 is overbought—price rose quickly and may pull back. Below 30 is oversold—price fell quickly and may bounce. Use RSI with trend analysis for best results.
RSI Trading Strategies
Overbought/Oversold
Buy RSI below 30, sell above 70. Works best in ranging markets.
Trend-Adjusted RSI
In uptrends, buy RSI 40-50 dips. In downtrends, sell RSI 50-60 rallies.
Divergence Trading
Trade when RSI diverges from price—often precedes reversals.
RSI Breakouts
When RSI breaks above 50 from below, momentum shifts bullish.
RSI in Different Market Conditions
Trending Markets
RSI can stay overbought/oversold for extended periods. Don’t fade strong trends.
Ranging Markets
RSI works well for mean reversion—buy oversold, sell overbought.
Volatile Markets
Use wider thresholds (80/20 instead of 70/30) to filter noise.
RSI Divergences
Bullish Divergence
- Price: Lower low
- RSI: Higher low
- Meaning: Selling pressure weakening
- Action: Prepare for potential reversal up
Bearish Divergence
- Price: Higher high
- RSI: Lower high
- Meaning: Buying pressure weakening
- Action: Prepare for potential reversal down
Common Mistakes
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Selling just because RSI is high – Strong trends stay overbought. Confirm with price action.
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Buying just because RSI is low – Falling knives have low RSI. Wait for reversal confirmation.
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Ignoring the trend – RSI works differently in trends vs ranges.
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Missing divergences – Divergences are RSI’s most powerful signal.
How JournalPlus Tracks RSI
JournalPlus logs RSI values at entry and exit, helping you analyze whether your RSI-based entries correlate with trade success.
