How do traders use RSI?

Above 70 is called overbought: the price rose fast and may pause. Below 30 is called oversold: the price fell fast and may bounce. In a strong uptrend RSI can stay above 60-70 for a long time, so 'overbought' alone is not a sell signal. Divergence: price makes a new high but RSI makes a lower high, showing weaker momentum.

Momentum oscillators

Relative Strength Index (RSI)

RSI measures how strong recent up-moves are compared with recent down-moves, on a scale of 0 to 100. It was created by J. Welles Wilder and uses a 14-candle smoothing by default.

How to read it

Above 70 is called overbought: the price rose fast and may pause.
Below 30 is called oversold: the price fell fast and may bounce.
In a strong uptrend RSI can stay above 60-70 for a long time, so 'overbought' alone is not a sell signal.
Divergence: price makes a new high but RSI makes a lower high, showing weaker momentum.

Settings

Default length 14. Shorter (7-9) reacts faster with more false signals; longer (21) is smoother.

Example rule to test

Rule to test: buy when RSI(14) crosses above 30 and the price is above the 200 EMA; exit when RSI goes above 70.

Common mistake

Selling just because RSI is above 70 in a strong trend. Combine it with trend and price levels.

Try it free on iTradeChart

For learning only. Backtests use past data and do not guarantee future results. Not investment advice.