The Relative Strength Index stands as one of the most trusted momentum oscillators in trading. Created decades ago, this technical indicator helps traders make smarter decisions about when to enter or exit positions. 

RSI measures the speed and magnitude of price changes, providing valuable insights into market conditions. Many traders rely on RSI because it offers clear signals about market momentum. The indicator oscillates between 0 and 100, making it easy to interpret. 

When you understand how to read these signals properly, the RSI indicator becomes a powerful tool for improving your trading results.

Identifying Overbought and Oversold Conditions

RSI excels at highlighting when prices have moved too far, too fast. When the indicator climbs above 70, it suggests the asset might be overbought. This doesn’t guarantee an immediate price drop, but it warns that buying pressure may be weakening.

Conversely, RSI readings below 30 often signal oversold conditions. This suggests selling pressure might be exhausting itself, potentially setting up a buying opportunity. Smart traders use these signals as alerts to watch for other confirming indicators before making trades.

Spotting Potential Reversals

RSI shines when it comes to identifying potential turning points in price action. The most reliable reversal signals occur when RSI reaches extreme levels and then starts moving back toward the middle range.

For example, when RSI drops below 30 and then climbs back above this level, it often signals the end of selling pressure. This creates a potential buying opportunity as momentum shifts from negative to positive.

The same principle works in reverse. When RSI falls from above 70 back below this threshold, it may indicate that buying pressure is diminishing and a price decline could follow.

Generating Trading Signals

RSI provides several types of trading signals that help time your entries and exits. The most straightforward signals come from RSI crossing the 30 and 70 levels. These crossings often coincide with good trading opportunities.

Another powerful signal occurs when RSI crosses above or below the 50 midline. This crossing can indicate a shift in overall momentum. When RSI moves above 50, it suggests bullish momentum is taking control. When it drops below 50, bearish momentum may be gaining strength.

These signals work best when they align with other technical factors like support and resistance levels or chart patterns.

Determining the Strength of a Trend

RSI helps measure how strong a trend really is. During powerful uptrends, RSI often remains in the upper range (between 40 and 80) for extended periods. This persistence indicates strong underlying momentum.

Weak trends show different RSI behavior. The indicator tends to oscillate more frequently between overbought and oversold levels. This choppy movement suggests the trend lacks conviction and might be ready to change direction.

Understanding trend strength through RSI helps you decide whether to hold positions longer or take profits quickly.

Divergence Detection

Perhaps RSI’s most powerful feature is its ability to spot divergences between price and momentum. Bullish divergence occurs when price makes lower lows while RSI makes higher lows. This suggests selling pressure is weakening even though prices continue falling.

Bearish divergence happens when price reaches higher highs while RSI forms lower highs. This indicates buying momentum is fading despite rising prices.

Divergences often precede significant price reversals, making them valuable for both entry and exit timing. They provide early warning signs that the current price direction might be losing steam.