Reading RSI properly, and three common mistakes

RSI is the most popular indicator after the
moving average, and also the most misused. The three
mistakes below turn a useful tool into a machine for generating losing signals.

1. What RSI measures

The relative strength index compares the average size of up moves with the average size of down
moves over the last N candles, usually 14. The result sits between 0 and 100.

The thing to understand: RSI measures the speed and size of price movement, not
whether price is expensive or cheap.

2. Mistake one: selling above 70 and buying below 30

This is the most commonly taught use and the most damaging. In a strong trend, RSI can stay
above 70 for weeks while price keeps rising.

RSI above 70 does not mean “a fall is due”. It means “price is rising strongly” — which is a reason
to consider buying with the trend, not selling against it.

A better use: in an uptrend, treat the 40–50 zone as the place to buy pullbacks
rather than waiting for 30.

3. Mistake two: trading divergence on its own

Divergence — price making a higher high while RSI makes a
lower high — is worth noticing. But divergence appears very frequently in a strong trend, and most
instances do not lead to a reversal.

A better use: only consider divergence at an important
support or resistance zone, and wait for price to confirm by
breaking structure. Divergence is a secondary condition, not the primary signal.

4. Mistake three: using RSI without trend context

RSI is an oscillator, designed for ranging markets. Applying it to a strong trend with no filter is
a recipe for repeatedly entering against it.

A better use: establish direction with a trend tool first, then accept only RSI
signals that point the same way.

5. The most valuable way to use RSI

Not to find reversals, but to judge the strength of a trend:

• In a healthy uptrend, RSI usually oscillates between 40 and 80 and does not break 40.
• When RSI starts breaking 40 and then 30 within the same uptrend, the structure is changing.
• The reverse in a downtrend: a 20–60 band, with a move above 60 as the signal.

That reading turns RSI from a reversal predictor into a description of the current state — which is
what it is actually good at.

6. On changing the settings

Many people switch the 14 period to 7 or 21, hunting for a configuration that looks better on past
data. That is over-optimisation: a setting that looks good on history usually performs worse on new
data. Leave the default and spend the effort on context instead.

This article is for information only and is not investment advice. Conditions and fee levels are published by the brokers and can change at any time — check with the broker you actually use. Leveraged forex and CFD trading carries a high level of risk and can cost you your entire deposit.