What is the RSI indicator?
Written by an ex-institutional trader. What the RSI (Relative Strength Index) is, shown with a diagram, how the 70 and 30 levels flag overbought and oversold conditions, how traders actually use it, and the mistakes that catch beginners out.
Direct answer
The RSI, or Relative Strength Index, is a momentum indicator that measures the speed and size of recent price moves on a scale from 0 to 100, to judge whether an asset is overbought or oversold. A reading above 70 traditionally signals overbought (the move may be stretched and due a pause or pullback); a reading below 30 signals oversold (the fall may be overdone). It is one of the most widely used technical indicators in forex and CFD trading.
RSI is most useful as a confirmation tool, not a standalone buy or sell signal. In a strong trend it can stay overbought or oversold for a long time, so acting on the levels alone gets traders run over. Its higher-value signal is divergence, where price makes a new high or low that RSI does not, hinting the trend is weakening. Like every indicator, it works best combined with price structure and risk management, not on its own.
What the RSI is
The RSI, or Relative Strength Index, is a momentum indicator that measures the speed and size of recent price moves on a scale from 0 to 100. Developed by J. Welles Wilder in 1978, it compares the average size of recent gains to recent losses to gauge how strong and how stretched a move is. It appears as a line in a separate panel below the price chart, swinging between 0 and 100.
The idea is simple: when buying has dominated and pushed RSI high, the move may be getting overextended; when selling has dominated and pushed it low, the fall may be overdone. RSI does not tell you direction on its own, it tells you about momentum, which is why it pairs naturally with support and resistance and candlestick patterns.
Disclosure: SatoshiMacro may earn a commission if you open a broker account through links on this page, at no extra cost to you. See our full affiliate disclosure.
Overbought and oversold
The two levels that matter most are 70 and 30. Above 70, RSI is in overbought territory: momentum is strong and the move may be due a pause. Below 30, it is oversold: the decline may be overdone. The 50 midline separates bullish momentum (above) from bearish (below).
The key caution sits inside this picture. These are not automatic buy and sell lines. In a strong trend RSI can sit above 70 or below 30 for a long stretch while the price keeps moving, so the levels are a flag to pay attention, not a trigger to trade against the trend.
How traders use it
RSI is most valuable as a confirmation tool rather than a standalone signal. A few common, sensible uses:
- Confirming a reversal at a level. When price reaches support or resistance and RSI is also oversold or overbought, the two together are stronger than either alone.
- Reading the 50 midline for trend. RSI holding above 50 supports a bullish bias; below 50 supports a bearish one. Some trend traders use the midline rather than the 70/30 extremes.
- Filtering with the trend. In an uptrend, oversold RSI pullbacks can mark buying opportunities in the direction of the trend, which is safer than shorting overbought readings against it.
The thread through all of these is that RSI confirms an idea you already have from price; it rarely pays to trade on RSI alone.
Divergence: the higher-quality signal
The signal experienced traders value most from RSI is divergence, where price and RSI disagree.
- Bearish divergence: price makes a higher high, but RSI makes a lower high. The new price high came on weaker momentum, hinting the uptrend is tiring.
- Bullish divergence: price makes a lower low, but RSI makes a higher low. The new low came on less selling force, hinting the downtrend is fading.
Divergence is generally more reliable than the raw 70/30 levels because it speaks to the momentum behind a move rather than just its extremity. It still needs confirmation, a candlestick reversal or a level break, before acting, but it is the RSI signal worth learning properly.
Common mistakes
Most RSI failures come from a handful of repeated errors:
- Selling every time RSI hits 70. In a strong trend this fights the move and bleeds the account. Overbought is a caution, not a sell button.
- Using RSI alone. No single indicator is enough. RSI needs the context of trend, structure and confirmation.
- Over-optimising the settings. Endlessly tweaking the period chases noise. The default 14 is fine for almost everyone.
- Ignoring risk management. The indicator does not protect the account; a stop loss and proper position size do.
Used as one input among several, with the trend and a defined risk, RSI earns its place. Build the rest of the foundation with candlestick patterns, support and resistance and forex trading strategies, and choose a broker with strong charting from the best forex brokers in Australia ranking.
Popular ASIC-regulated CFD brokers
All three are ASIC-regulated with free demo accounts. CFD Service. Your capital is at risk.
Diagram is illustrative. Last reviewed: 2026-06-01.
Frequently asked questions
What is the RSI indicator in simple terms?
The RSI, or Relative Strength Index, is a momentum gauge that scores recent price action from 0 to 100. It compares the size of recent gains to recent losses to show how strong and stretched a move is. High readings mean buyers have been dominant and the asset may be overbought; low readings mean sellers have dominated and it may be oversold. It is shown as a line in a separate panel below the price chart, oscillating between 0 and 100, and is one of the most popular indicators in trading.
What is a good RSI level?
There is no single good level; it depends on what you are looking for. The traditional thresholds are 70 and 30: above 70 is considered overbought and below 30 oversold, with 50 acting as a midline that separates bullish from bearish momentum. Some traders tighten these to 80 and 20 to reduce false signals in trending markets, or use 60 and 40 in ranging markets. The level is a guide to momentum, not an automatic instruction to buy or sell.
Does RSI above 70 mean sell?
Not by itself. RSI above 70 means momentum is strong and the move may be stretched, but in a powerful uptrend RSI can stay above 70 for a long time while the price keeps rising. Selling purely because RSI hit 70 is one of the most common ways beginners fight a trend and lose. Treat overbought as a caution to watch for a reversal signal, such as a bearish candlestick or a break of support, rather than as a sell trigger on its own.
What is RSI divergence?
RSI divergence is when price and RSI disagree, which often warns that a trend is weakening. Bearish divergence is when price makes a higher high but RSI makes a lower high, suggesting the uptrend is losing momentum. Bullish divergence is the reverse: price makes a lower low but RSI makes a higher low, hinting the downtrend is fading. Divergence is generally a higher-quality RSI signal than the raw overbought and oversold levels, though it still needs confirmation before acting.
What RSI settings should I use?
The standard setting is a 14-period RSI, meaning it looks at the last 14 candles, which works on any timeframe and is what most charts default to. A shorter period, such as 7 or 9, makes RSI more sensitive and produces more signals, suiting short-term traders but generating more noise. A longer period, such as 21, smooths it for a slower, more reliable read. Most traders start with the default 14 and only change it once they understand how the sensitivity trade-off affects their style.
Is the RSI indicator reliable?
RSI is useful but not reliable as a standalone signal. Its weakness is that it can stay overbought or oversold for extended periods in a strong trend, so the levels alone produce many false signals. It works best as one input among several: combined with the trend direction, support and resistance, and candlestick confirmation, with divergence as its higher-quality signal. No indicator is reliable on its own, and RSI is no exception. Risk management, not the indicator, is what protects the account.
