Master RSI Indicator: Strategy, Trends & Signals
Introduction
RSI (Relative Strength Index) was introduced by J. Welles Wilder in 1978 in his book "New Concepts in Technical Trading Systems".
RSI is the most widely used and most misunderstood indicator in trading.
Many traders think RSI is the "holy grail" and expect it to always predict the market accurately.
Many traders believe that the divergences drawn from it are always guaranteed, which is not correct.
This article explains how RSI should be used properly.
How to Plot RSI on the Chart
- Go to the indicators section on your charting platform.
- Search for Relative Strength Index.
- Click to apply it to your chart.
- By default, RSI comes with a 14-period setting.
- You can change the settings to suit scalping, intraday, or swing trading.
- Changing the settings will provide different RSI outputs.
- The SMMA (Smoothed Moving Average) is the method introduced by Wilder for RSI calculation.
RSI Overbought & Oversold Zones
⚠️ Common Misconception
Many people see overbought and immediately think they should sell, or they see oversold and immediately think they should buy. This is a wrong concept.
- RSI overbought does not mean you should immediately sell.
- RSI oversold does not mean you should immediately buy.
- RSI signals must be combined with price action and other confirmations to make the right trading decisions.
How to Draw Trendlines on RSI
- You can draw support and resistance on RSI.
- You can draw trendlines on RSI.
- When RSI trendlines break, it gives a trade entry.
- Candle volume should be high when RSI trendline breaks.
- You can draw trendlines on RSI to get valid signals.
RSI in Market Structure Analysis
- RSI helps to see market structure.
- RSI and price structure should match.
- If they match, the trend is valid.
- If they do not match, it shows divergence.
- This is an important point in market structure analysis.
Understanding RSI Divergence
📈 Bullish Divergence
Price makes a lower low and RSI makes a higher low. It is more effective if the RSI is below 50.
📉 Bearish Divergence
Price makes a higher high and RSI makes a lower high. It is more effective if the RSI is above 50.
- RSI shows divergence when price and RSI do not move together.
- RSI range is from 0 to 100.
Different RSI Levels Explained
0 to 15: Smart Money Zone
Smart money accumulates. Good buying zone. Multi-timeframe confirmation required.
15 to 30: Good Buying Zone
Good buying zone. Avoid selling.
30 to 45: Retest Zone
Secondary entry. Matches Fibonacci retracement zones.
55 to 70: Middle Range
Both buyers and sellers active. Avoid trading here.
70 to 85: Profit Booking Zone
Retail traders start selling here.
85 to 100: Stop Loss Hunting
Smart money adds sell positions here.
Major RSI Patterns You Should Know
- Double top forms on RSI. Stronger signal than overbought.
- Double bottom forms on RSI. Indicates bullish movement.
- RSI shows patterns like head & shoulders, cup & handle, Adam & Eve.
- These patterns are also seen in RSI.
Using RSI with Volume
- When RSI trendline breaks, candle volume should be high.
- When RSI retests, candle volume should be low.
- Volume confirmation with RSI gives better results.
RSI with Candlestick Patterns
- When RSI is above 50 level and market structure is bullish.
- When candlestick pattern shows bullish signal.
- RSI with candlestick patterns gives strong confirmation.
How to Use Supply & Demand Zones with RSI
- RSI in demand zone gives good buy opportunity.
- RSI in supply zone gives good sell opportunity.
- RSI with supply and demand zones increases accuracy.
Conclusion
- RSI is a powerful tool but is often misunderstood.
- Many traders make the mistake of buying just because RSI is oversold or selling just because it is overbought.
- This is not a reliable method.
- RSI should be used with trendlines, divergence, volume, candlestick patterns, and supply and demand zones.
- Proper combination of these factors gives high-probability trade entries.
- Understanding RSI deeply can improve trading results.
- It is important to avoid common mistakes while using RSI.
- Focus on using RSI with correct structure and confirmations for better accuracy.