RSI: The momentum indicator that traders need to know

RSI (Relative Strength Index) is one of the most popular technical analysis tools in the world. However, its biggest problem is that 90% of traders use it incorrectly. They buy at 30 and sell at 70 and end up losing because they don’t understand what RSI was created for.

Today, we will reveal the behind-the-scenes of this tool, discuss the calculation method that will help you see the truth, and teach the techniques that professionals actually use.

Market Momentum and the True RSI

The tool developed by J. Welles Wilder Jr. in 1978 was not designed to indicate reversal points as many people have understood.

First importance: RSI is a Momentum Oscillator. Its core is measuring the speed (Velocity) and magnitude (Magnitude) of price changes. It shows which force is dominant in the current market movement.

Second importance: The term “Relative Strength” does not mean comparing assets to other assets. This misconception causes much confusion. It actually refers to comparing the average buying force to the average selling force within the same asset.

The correct meaning is: RSI = a tool that indicates the nature of momentum, not a tool that signals reversals.

If RSI rises to a specific high, it indicates “buying pressure is very strong” — not “sell immediately.”

Deep Dive into the Calculation Formula

Most traders don’t need to calculate RSI themselves because platforms do it for them. But understanding the formula will elevate your use of it to a professional level.

The core of the formula is the variable RS (Relative Strength)

RS = Average Gain (Average Buying Force) ÷ Average Loss (Average Selling Force)

• Average Gain (AvgU): The average of days when the closing price was positive over 14 days (or 14 bars, depending on settings)
• Average Loss (AvgD): The average of days when the closing price was negative over the same period (taken as positive values)

Lessons from this formula:

• If Average Gain > Average Loss → RS > 1 → RSI moves above 50
• If Average Gain < Average Loss → RS < 1 → RSI moves below 50
• If Average Gain = Average Loss → RS = 1 → RSI = 50 exactly

This is the most important point: The 50 line is the true equilibrium point of the market, not 70 or 30 as most people think.

Common Misunderstandings and Serious Consequences

When traders first see RSI, they see two horizontal lines: 70 and 30. This is where problems begin.

Old misconceptions:

• Overbought: RSI > 70 → Asset is too expensive → Sell
• Oversold: RSI < 30 → Asset is too cheap → Buy

This theory sounds reasonable but is a dangerous trap. Actual trading results show that this method fails miserably.

Why does it fail? The answer is trend (Trend).

In a strong trending market (whether uptrend or downtrend), RSI can stay in the Overbought zone (>70) or Oversold (<30) for weeks or even months.

Think of a strong uptrend in gold: RSI might stay above 70 for many weeks because it reflects that buying momentum remains very strong. If novice traders rush to sell every time, they are “fighting the trend,” which will drain their portfolio.

Similarly, in a strong downtrend, RSI staying below 30 for a long time and buying because oversold is like “catching a falling knife” while the price continues to drop.

When is the 70/30 line useful? Only in a Sideways (range-bound) market. When the price has no clear direction, buying at 30 (near support) and selling at 70 (near resistance) can be effective.

Professional RSI Trading Techniques

This section will transform your trading from beginner to professional level.

1. Divergence: Powerful Early Warning Signal

Divergence occurs when the price and RSI move in opposite directions. It indicates that the current trend is losing strength.

Bullish Divergence (Uptrend Signal):

• Occurs while the market is still downtrend
• Price makes a new low (LL), but RSI does not follow; instead, it makes a higher low (HL)
• Indicates: Selling momentum (Selling pressure) is weakening, and the market may reverse upward
• Most reliable when: Occurs in the Oversold zone (<30)

Bearish Divergence (Downtrend Signal):

• Occurs while the market is still uptrend
• Price makes a new high (HH), but RSI fails to follow; instead, it makes a lower high (LH)
• Indicates: Buying momentum (Buying pressure) is weakening, and the market may reverse downward
• Most reliable when: Occurs in the Overbought zone (>70)

2. Failure Swings: The Strongest Confirmation

Wilder himself said that Failure Swing is the strongest signal to confirm a reversal.

If Divergence is a warning, then Failure Swing is a confirmation to act.

Failure Swing Top (Confirms Downtrend):

• RSI rises above 70 (High at 1)
• Price makes a new high, but RSI does not follow (Bearish Divergence)
• Key point: RSI breaks below its previous low = confirms momentum has shifted to bearish → Sell Signal

Failure Swing Bottom (Confirms Uptrend):

• RSI drops below 30 (Low at 1)
• Price makes a new low, but RSI does not follow (Bullish Divergence)
• Key point: RSI breaks above its previous high = confirms momentum has shifted to bullish → Buy Signal

This technique uses RSI to “confirm itself” first, making signals more accurate.

3. The 50 Line as the True Compass

For trend-following traders, the 50 line may be even more important than 70/30.

• RSI > 50: Bullish market, strong buying pressure. As long as above 50, consider buying opportunities.
• RSI < 50: Bearish market, strong selling pressure. As long as below 50, consider selling opportunities.

It’s a simple compass but highly effective.

4. Adjust RSI Zones According to the Trend (Ultimate Technique)

Advanced traders know that the 70/30 lines are not fixed overbought/oversold zones. They shift according to the trend.

In a strong uptrend:

• RSI does not fall below 30; it moves within 40-90
• The 40-50 zone acts as a “new oversold” and support
• Usage: Wait for RSI to dip into 40-50 and bounce back. That’s a good entry point for buying.
• Avoid selling at 70: That’s fighting the strong, overheated trend.

In a strong downtrend:

• RSI does not rise above 70; it moves within 10-60
• The 50-60 zone acts as a “new overbought” and resistance
• Usage: Wait for RSI to bounce up to 50-60 and fail to go higher. That’s a good entry point for selling.
• Avoid buying at 30: That’s catching a falling knife.

RSI Weaknesses and How to Fix Them

No indicator is perfect. RSI has its weaknesses:

• False signals in volatile markets: Avoid by using longer timeframes
• Staying in 70/30 zones during strong trends: Avoid by adjusting zones according to the trend
• Lagging indicator: It always calculates from past 14 bars
• Divergence takes time: Price may continue moving for a long time before a true reversal

All solutions: Never rely on RSI alone. Use Confluence — look for confirmation from multiple tools.

• RSI + Price Action (Support-Resistance): Buy when RSI hits 30 and price reaches support simultaneously
• RSI + MACD: Wait for dual signals — RSI divergence and MACD crossover
• RSI + Candle Patterns: Price forms reversal patterns (Engulfing, Hammer) at points where RSI signals divergence

Practical RSI Trading Example

Suppose trading gold XAUUSD on a 4-hour timeframe.

Step 1: Big picture Open daily chart. Notice continuous upward trend approaching psychological resistance at $4,250.

Step 2: Look for warning signals Price makes higher high above 4,200, but RSI shows Bearish Divergence — RSI fails to make a new high, instead making a lower high.

Step 3: Wait for confirmation

• Failure Swing: RSI breaks below previous low
• Centerline: RSI crosses below 50
• Price action: Bearish Engulfing candle at resistance at 4,250

Step 4: Enter trade All confirmation signals align → Open a Sell order on XAUUSD.

Step 5: Manage risk

• Stop Loss: Above recent high (4,250)
• Take Profit: Near support at (3,879)

This method offers a favorable Risk:Reward ratio.

Summary

What is RSI? → A tool to measure momentum, not a reversal indicator.

Proper usage: Don’t just look at overbought/oversold levels and buy/sell directly. Instead:

1. Understand that the 50 line is the true equilibrium point.
2. Use Divergence and Failure Swing for more precise signals.
3. Adjust RSI zones according to the trend.
4. Most importantly: Use Confluence — wait for signals from multiple tools simultaneously.

Whether trading Forex, gold, oil, indices, or crypto, understanding RSI correctly will be a solid foundation for your trading success.