The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes. Developed by J. Welles Wilder Jr. in 1978, RSI helps traders identify overbought and oversold conditions.
Key Concept: RSI oscillates between 0 and 100, making it easy to identify extreme conditions at a glance.
Understanding RSI Levels
| RSI Level | Condition | Interpretation |
|---|---|---|
| Above 70 | Overbought | Price may be due for a pullback |
| 50-70 | Bullish momentum | Uptrend is healthy |
| 30-50 | Bearish momentum | Downtrend is healthy |
| Below 30 | Oversold | Price may be due for a bounce |
How RSI is Calculated
RSI uses average gains and losses over a period (typically 14 days):
RS = Average Gain / Average Loss RSI = 100 - (100 / (1 + RS)) Example: If avg gain = 1.5% and avg loss = 0.5% RS = 1.5 / 0.5 = 3 RSI = 100 - (100 / 4) = 75 (Overbought territory)
Trading Strategies Using RSI
Strategy 1: Overbought/Oversold
The classic RSI strategy:
- Buy signal: RSI drops below 30, then rises back above 30
- Sell signal: RSI rises above 70, then drops back below 70
Common Mistake: Don't buy just because RSI is below 30! Wait for RSI to start rising again. In strong downtrends, RSI can stay oversold for extended periods.
Strategy 2: RSI Divergence
One of the most powerful RSI signals:
- Bullish divergence: Price makes lower lows, but RSI makes higher lows → Potential reversal up
- Bearish divergence: Price makes higher highs, but RSI makes lower highs → Potential reversal down
Strategy 3: RSI Range Shifts
In strong trends, RSI behaves differently:
| Market Condition | RSI Range | What It Means |
|---|---|---|
| Strong uptrend | 40-90 | RSI rarely goes below 40 |
| Strong downtrend | 10-60 | RSI rarely goes above 60 |
| Sideways market | 30-70 | Normal oscillation |
RSI Period Settings
- RSI 14: Standard setting, balanced sensitivity
- RSI 7: More sensitive, better for short-term trading, more signals
- RSI 21: Less sensitive, smoother, fewer false signals
Pro Tip: Combine RSI with trend indicators. Only take RSI oversold signals when the overall trend is bullish (e.g., price above SMA 200).
Using RSI in VivaTrades
Create RSI-based strategies:
- Oversold bounce: RSI < 30 as entry condition
- Overbought exit: RSI > 70 as exit condition
- With trend filter: RSI < 30 AND Close > SMA 200