The Relative Strength Index (RSI) measures the speed of recent price changes on a scale from 0 to 100. The textbook rule says above 70 is overbought and below 30 is oversold. Traded blindly, that rule loses money, because in strong trends the RSI can stay above 70 for days.
Use the RSI to read the trend
In uptrends, the RSI tends to move between 40 and 80; in downtrends, between 20 and 60. If the RSI keeps finding support around 40–50, buyers are in control. A break below 40 in an uptrend is a warning that momentum is fading.
Pullback entries
- Confirm the trend on a higher timeframe (price above the 50 EMA on the 4-hour chart).
- On the 1-hour chart, wait for the RSI to dip to the 40–50 area during a pullback.
- Enter when the RSI turns back up and price forms a bullish candle.
- Stop below the pullback low, target 2R.
Divergences
A bearish divergence is when price makes a higher high but the RSI makes a lower high: momentum is weakening. A bullish divergence is the opposite. Divergences warn that a move is tiring; they are not entry signals on their own. Wait for price to confirm, for example by breaking the last swing low after a bearish divergence.
Settings
The default 14-period setting is fine for most traders. Shorter settings (7–9) give more signals and more noise; longer settings (21) give fewer and slower signals.