RSI Indicator Made Simple: How to Read and Use RSI
Trade Life MasteryThe Relative Strength Index (RSI) is one of the most popular indicators traders use to spot momentum shifts, overbought conditions, and hidden opportunities.
The good news? It’s simple to learn and powerful when used correctly.
In this guide, we’ll break down what RSI is, how to read it, and how to use it in real-world trading setups.
What Is the RSI Indicator?
The Relative Strength Index (RSI) measures the speed and magnitude of recent price changes to identify overbought or oversold conditions.
- RSI values range from 0 to 100.
- Traditionally, an RSI above 70 is considered overbought.
- An RSI below 30 is considered oversold.
Developed by J. Welles Wilder, RSI is a momentum oscillator, helping traders gauge when a stock might be ready to reverse or continue its trend.
How to Read RSI on a Chart
Most charting platforms (like TradingView) display RSI as a separate line graph below the price chart.
Here’s how to interpret it:
- RSI > 70: Stock may be overbought — potential for pullback.
- RSI < 30: Stock may be oversold — potential for bounce.
- RSI between 40-60: Neutral zone, often during consolidation.
But remember: Overbought doesn’t mean “sell now.” Oversold doesn’t mean “buy now.” RSI should be used in context with trend, volume, and support/resistance.
RSI Divergence: A Powerful Signal
Divergence happens when price makes new highs (or lows), but RSI does not confirm that move.
- Bullish Divergence: Price makes a lower low, RSI makes a higher low — possible reversal up.
- Bearish Divergence: Price makes a higher high, RSI makes a lower high — possible reversal down.
Divergence signals can be early indicators of momentum shifts.
How Traders Use RSI in Real Setups
- Confirm Trend Strength: In strong uptrends, RSI often stays above 40. In downtrends, below 60.
- Identify Pullbacks for Entry: Buy pullbacks when RSI resets near 30 in an uptrend.
- Exit Overextended Moves: Take profits when RSI nears 70-80 and shows signs of slowing.
Pro Tip: Combine RSI signals with moving averages (like the 9 EMA), VWAP, and volume spikes for better accuracy.
Common RSI Mistakes to Avoid
❌ Blindly selling because RSI hits 70. ❌ Buying every time RSI dips under 30 without context. ❌ Ignoring the overall market trend. ❌ Forgetting that strong stocks stay overbought longer.
Related Guides to Improve Your Trading
- What Is Trading? A Beginner’s Guide
- Day Trading vs. Swing Trading: Which One Suits You?
- How to Read Stock Charts Like a Pro
External Reference:
For more on RSI and its calculation, visit Investopedia’s RSI Explanation.
Final Word: RSI Simplified for Better Trades
The RSI is not a magic signal. But when combined with good chart analysis, it helps you time entries, exits, and spot shifts in momentum.
Focus on context, trend, and confluence — not just numbers.