The RSI is a momentum oscillator that measures the speed and magnitude of recent price changes. Created by J. Welles Wilder in 1978, it oscillates between 0 and 100, helping traders identify overbought and oversold conditions. But RSI is widely misunderstood — most traders use it wrong. Here's how to use it like a professional.
Key points
RSI above 70 = Overbought (stock may be overextended). RSI below 30 = Oversold (stock may be due for a bounce)
BUT: In strong uptrends, RSI can stay above 70 for weeks. In strong downtrends, it can stay below 30. Overbought ≠ sell signal
RSI Divergence (Bearish): Price makes a higher high, but RSI makes a lower high. Warns of weakening momentum — potential reversal coming
RSI Divergence (Bullish): Price makes a lower low, but RSI makes a higher low. Buying pressure is building despite new lows — potential bottom
RSI 50 Level: Often acts as support in uptrends and resistance in downtrends. RSI bouncing off 50 = trend continuation signal
RSI Range Shift: In bull markets, RSI oscillates between 40-80. In bear markets, 20-60. This 'range shift' tells you the dominant regime
14-period RSI is standard. Use 7-period for more sensitive readings (swing trading). Use 21-period for smoother signals (positional)
RSI on Weekly Charts: Far more reliable than daily. Weekly RSI oversold (below 30) on a quality stock = excellent long-term buying opportunity
Formula
RSI = 100 - [100 / (1 + RS)] where RS = Average Gain over N periods / Average Loss over N periods
Pro tip — The BEST RSI signal is a bullish divergence at a known support level with increasing volume. Three confirmations aligned = very high probability trade. Example: Stock tests ₹500 support for the 3rd time, RSI shows higher low (divergence), and volume increases on the bounce.