RSI indicator explained — how to use the relative strength index for momentum trading.

The relative strength index (RSI) is a momentum oscillator developed by J. Welles Wilder that measures the speed and magnitude of recent price changes in a security. The RSI oscillates between 0 and 100 and is one of the most widely used technical indicators for identifying overbought and oversold conditions.

The RSI compares the average gain of up periods to the average loss of down periods over a standard lookback of 14 periods. A reading above 70 suggests an asset is overbought and may be due for a pullback. A reading below 30 suggests it is oversold and could be due for a bounce. The centreline at 50 indicates whether bulls or bears are in control.

What makes the RSI such a powerful tool is not just the extreme thresholds, but the signals generated when price and RSI move in opposite directions — known as RSI divergence. When combined with the MACD indicator and other tools, the RSI becomes a cornerstone of momentum trading strategies.

See how the RSI fits into the bigger picture by reading the complete guide to how to read technical analysis.

Reading the RSI is straightforward once you understand its key levels and what each zone reveals about market psychology. The table below summarises the standard interpretation.

The centreline (50)

When the RSI is above 50, the stock has more up periods than down periods — the bulls are in control. When it is below 50, bears have the upper hand. The 50 level can act as a signal line: an RSI crossing above 50 from below can indicate a shift from bearish to bullish momentum, while a cross below 50 warns of weakening momentum.

RSI trend direction

The direction of the RSI line itself is just as important as the level. A rising RSI tells you that buying pressure is building even if price has not yet moved significantly. A falling RSI warns that momentum is fading before price confirms the drop. Comparing RSI direction to price direction is the basis of RSI divergence analysis, which we cover below.

The most well-known RSI signals come from extreme readings. Knowing what overbought and oversold means is essential for anyone learning how to use the RSI indicator effectively.

Overbought (RSI above 70)

An overbought reading suggests the stock has risen too far, too fast and is due for a pullback or consolidation. However, in strong uptrends the RSI can remain above 70 for extended periods as the stock continues to advance. RSI overbought readings in an uptrend should not automatically be taken as sell signals — they often confirm the strength of the trend.

Oversold (RSI below 30)

An oversold reading can indicate a potential bounce, but in strong downtrends the RSI can stay below 30 for weeks. The best buying opportunities often come when the RSI moves back above 30 after being oversold — this suggests the selling pressure has exhausted and buying momentum is returning.

Always interpret overbought and oversold readings in the context of the broader trend identified by moving averages and support and resistance levels.

RSI divergence is one of the most reliable signals in technical analysis. It occurs when price moves in one direction while the RSI moves in the opposite direction, revealing that momentum is not confirming the price move. Understanding how to spot RSI divergence is a key skill for anyone learning how to use the RSI indicator.

Bullish divergence

Price makes a lower low, but the RSI makes a higher low. This tells you that selling momentum is weakening even as price drops deeper. Bullish divergence often precedes a trend reversal to the upside and is strongest when the RSI’s second low is below 30 (oversold).

Bearish divergence

Price makes a higher high, but the RSI makes a lower high. This warns that buying momentum is fading even as price climbs further. Bearish divergence can signal an upcoming decline and is most significant when the RSI’s second high is above 70 (overbought).

RSI divergence works best on longer timeframes (daily, weekly) and with liquid, actively traded stocks. Combined with other tools like chart patterns, it becomes a powerful edge for timing entries and exits.

While the RSI is the most popular momentum oscillator, combining it with the MACD indicator and the stochastic oscillator gives you a more complete picture of market momentum.

MACD indicator

The MACD (moving average convergence divergence) tracks the relationship between two exponential moving averages. It consists of a MACD line (12-day EMA minus 26-day EMA), a signal line (9-day EMA of the MACD), and a histogram showing the difference. Buy signals occur when the MACD line crosses above the signal line; sell signals occur on the reverse. The MACD indicator is best for trend confirmation — use it alongside the RSI to confirm that overbought or oversold readings align with the broader trend direction.

Stochastic oscillator

The stochastic oscillator compares a stock’s closing price to its price range over a set period. Like the RSI, it ranges from 0 to 100, with readings above 80 considered overbought and below 20 considered oversold. The stochastic is more sensitive than the RSI and produces more signals, making it useful for short-term traders but more prone to false readings in choppy markets. Many traders use the RSI as their primary indicator and the stochastic as a secondary confirmation.

Continue learning with our guides on chart patterns, support and resistance, and moving averages. Or return to the full technical analysis guide.