The Relative Strength Index (RSI) is one of the most widely used technical indicators in stock trading. Developed by J. Welles Wilder Jr. in 1978, the RSI helps traders identify overbought and oversold conditions, potential trend reversals, and momentum shifts.

In this guide, we'll cover everything you need to know to use RSI effectively in your trading.

What is the RSI Indicator?

The RSI is a momentum oscillator that measures the speed and magnitude of recent price changes. It oscillates between 0 and 100, providing a normalized view of buying and selling pressure.

The RSI Formula:

RSI = 100 - (100 / (1 + RS))

Where RS = Average Gain / Average Loss (over N periods)

Most traders use a 14-period RSI, though shorter periods (like 7) increase sensitivity while longer periods (like 21) smooth out the signal.

Key RSI Levels

Overbought (Above 70)

When RSI rises above 70, the stock is considered overbought. This doesn't mean you should sell immediately—strong uptrends can stay overbought for extended periods. However, it does signal:

Oversold (Below 30)

When RSI drops below 30, the stock is oversold. Again, this isn't an automatic buy signal—stocks in strong downtrends can remain oversold. But it indicates:

The Neutral Zone (30-70)

Most of the time, RSI oscillates in the neutral zone. Movement within this range reflects normal price fluctuations and doesn't generate strong signals on its own.

RSI Trading Strategies

1. Overbought/Oversold Reversals

The classic RSI strategy: buy when RSI drops below 30 and then crosses back above, sell when RSI rises above 70 and then crosses back below.

Entry Rules:
- Buy: RSI crosses above 30 from below
- Sell: RSI crosses below 70 from above

Important: This strategy works best in ranging markets. In strong trends, you'll get stopped out repeatedly.

2. RSI Divergence

Divergence occurs when price makes a new high/low but RSI doesn't confirm it. This is one of the most powerful RSI signals.

Bullish Divergence:
- Price makes a lower low
- RSI makes a higher low
- Suggests downtrend is weakening

Bearish Divergence:
- Price makes a higher high
- RSI makes a lower high
- Suggests uptrend is weakening

Divergences don't predict exact reversal points, but they warn you that momentum is shifting.

3. RSI Trend Confirmation

In uptrends, RSI tends to stay between 40-80. In downtrends, it stays between 20-60. You can use these ranges to confirm trend direction:

4. RSI + Moving Average Combination

Combine RSI with a moving average for higher-probability trades:

This filters out counter-trend trades that often fail.

Common RSI Mistakes to Avoid

During the 2020-2021 bull run, many stocks stayed overbought for months. Shorting every RSI > 70 reading would have been disastrous.

Solution: Use RSI for trend-following in strong trends, mean-reversion in ranging markets.

Mistake 2: Ignoring the Bigger Picture

RSI on a 5-minute chart might show oversold while the daily chart shows overbought. Always check multiple timeframes.

Mistake 3: Using RSI Alone

RSI works best when combined with other indicators—price action, volume, support/resistance levels. No single indicator tells the whole story.

RSI Settings: 14-Period vs. Others

Setting Best For Characteristics
7-period Day trading, scalping More signals, more noise
14-period Swing trading Standard, balanced
21-period Position trading Fewer signals, less noise

Real-World Example

Let's look at how RSI signaled opportunities in Apple (AAPL) during a recent correction:

  1. Day 1: AAPL drops 5%, RSI falls to 28 (oversold)
  2. Day 2: RSI stays at 25, price stabilizes
  3. Day 3: RSI crosses back above 30 → Entry signal
  4. Day 10: Price recovers 8%, RSI at 55 → Hold
  5. Day 15: RSI approaches 70 → Consider taking profits

The key was waiting for RSI to cross back above 30, not buying immediately when it went oversold.

Combining RSI with AI Predictions

Modern trading platforms like StockIceberg combine traditional indicators like RSI with machine learning models. This provides:

Key Takeaways

  1. RSI measures momentum on a 0-100 scale
  2. Above 70 = overbought, below 30 = oversold
  3. Divergences are powerful warning signals
  4. Don't trade RSI alone—combine with other analysis
  5. Adjust your strategy based on market conditions (trending vs. ranging)
  6. The best traders use RSI as one tool in a larger toolkit

Next Steps

Ready to apply RSI analysis to your portfolio? StockIceberg provides real-time RSI calculations across 30+ additional indicators, plus AI-powered predictions to help you spot high-probability setups.

Start with a free account and see how combining traditional technical analysis with modern AI can improve your trading decisions.