How to use RSI: overbought, oversold and what they really mean

To use RSI, read it as a measure of how one-sided recent moves have been, not as a buy or sell signal. Below 30 means selling has dominated the last 14 candles and above 70 means buying has, but in a trend those readings can last for a long time, so RSI works best as a filter that tells you when a setup makes sense and when to leave it alone.

This guide explains what RSI measures, why the 30 and 70 lines are often misread, how the same reading means different things in a range and in a trend, and how the strategies on this site use it. If you have not read how to read candlestick charts and support and resistance yet, start there. RSI makes much more sense on top of price than on its own.

What does RSI measure?

RSI (relative strength index) is a momentum gauge that sits under the price chart and moves between 0 and 100. On this site it always uses 14 periods, meaning the last 14 candles of whatever timeframe you are on: 14 hours on a 1-hour chart, 14 days on a daily chart.

It works by comparing two averages. One is the average size of the up closes over those candles. The other is the average size of the down closes. Their ratio is called RS, and the formula squeezes it into the 0 to 100 scale:

Notice what RSI does not measure. It knows nothing about levels, news, volume or the bigger trend. It only knows whether recent closes have mostly gone up or mostly gone down, and by how much. That is useful information, but it is one input, not a verdict.

What do overbought and oversold mean on RSI?

The common lines are 70 and 30. Above 70 is called overbought. Below 30 is called oversold. The words suggest that price has gone too far and must turn. That is the most common misunderstanding of RSI.

A reading above 70 means recent candles have closed up much more than down. That is what a strong rally looks like. It does not mean the rally is finished. In a powerful uptrend RSI can sit above 70 for many candles while price keeps climbing, and someone selling every overbought reading keeps stepping in front of it. The same is true in reverse: in a crash RSI can stay under 30 while price falls much further. Oversold can stay oversold.

A better reading of the lines is "the move has been one-sided." Whether that one-sidedness is about to fade or about to continue depends on context, and the main piece of context is whether the market is ranging or trending.

How does RSI behave in ranges and in trends?

In a range

When price is moving sideways between support and resistance, RSI tends to swing back and forth too. Drops to the range floor often push it toward 30, and rallies to the ceiling push it toward 70. Here the lines are most useful: a low RSI near support is evidence that the drop has been stretched, which is what a fade needs. The range trading guide covers this approach.

In a trend

In an uptrend RSI shifts upward. It tends to spend its time in the upper part of the scale and dips toward the middle on pullbacks, often without reaching 30 at all. In a downtrend it shifts down and rallies tend to stall around the middle. Waiting for an oversold reading to buy in an uptrend can mean waiting for the trend to break.

So before reading RSI, check the trend. On this site the bigger timeframe counts as trending up when its close is above its 20 EMA and its 20 EMA is above its 50 EMA. If you are unsure what that means, see moving averages explained.

40 to 60: the calm pullback zone

In an uptrend, a useful reading is not an extreme at all. When price pulls back to its 20 EMA and RSI sits between 40 and 60, momentum is neither stretched nor collapsing. Below 40, the dip may be turning into a real sell-off. Above 60, price has already bounced hard and much of the move is gone. The trend pullback setup uses exactly this filter.

What is RSI divergence?

Divergence is a disagreement between price and RSI. Bullish divergence is when price makes a lower low but RSI makes a higher low. Price went further down, but the selling that got it there was less forceful. Bearish divergence is the mirror: a higher high in price with a lower high in RSI.

Divergence is a warning, not a signal. Price can keep making lower lows with RSI diverging all the way down, especially in a strong downtrend. That is why the site's RSI divergence setup waits for confirmation: a candle that closes above the previous candle's high, showing buyers actually stepped in.

Why should RSI be a filter, not a trigger?

A trigger is the exact thing that gets you into a trade, such as a candle closing back above a level. A filter is a condition that has to be true before you even look for the trigger. RSI is much better at the second job.

Take the range fade. The trigger is a candle that wicks below the 24-hour low and closes back above it. RSI at 35 or below is the filter: it confirms that the drop into the low was stretched, which is the situation a fade is betting on. Without the wick and the close, a low RSI alone tells you nothing about when to buy. The same pattern runs through the other setups. The trend pullback uses RSI to reject dips that are too deep or bounces that are already done. If you want to measure stretch with price instead, Bollinger band reversion uses bands set 2 standard deviations around a 20-candle average.

Whatever role RSI plays, the stop still goes past the structure the trade is built on, and the size still comes from the stop. See managing a setup and how much to risk per trade.

Common mistakes

• Buying every reading under 30. In a downtrend RSI can stay oversold while price keeps falling, so each early buy becomes a stopped loss.
• Shorting every reading over 70. Strong rallies hold overbought readings for a long time, and fading them means fighting the trend.
• Ignoring the trend. The same RSI number means something different in a range and in a trend, so reading it without checking the trend gives the wrong answer half the time.
• Treating divergence as an entry. Divergence can repeat several times before price turns, so entering without a confirming close catches the falling price.
• Changing settings to fit the past. Tweaking the period or the lines until old signals look perfect makes a chart that explains history and predicts nothing.
• Using RSI without a level. An oversold reading in the middle of nowhere has no natural place for a stop or a target, so the trade has no shape.

What to check

1. Is the market ranging or trending? Look one timeframe up. In a range, extremes near 30 and 70 can be faded at the edges. In a trend, extremes often mean strength, and the middle of the scale matters more.
2. Is the reading at a level? RSI is most useful when price is at support or resistance. A stretched reading there tells you something. The same reading mid-range mostly does not.
3. What role is RSI playing? Decide whether it is a filter, a warning or something else before the trade. If it is the only reason to enter, there is no trigger and no clear stop.
4. Has price confirmed? For divergence or an oversold bounce, wait for a candle to close in your direction, such as above the previous candle's high, before acting.
5. Where is the stop, and is the target far enough? Put the stop past the swing low or level plus 0.2 ATR, and check that the first target is at least 1.5R away.
6. Is news coming? RSI cannot see a rate decision or a token unlock. A scheduled event can push a reading to an extreme and keep it there.
7. Did you test it on this coin? Run the exact rules, with fees of 0.1% each way, on the coin's own history before trusting them. None of these rules is known to make money.