Free Trading School · Level 7: Technical Indicators
RSI and momentum oscillators
The Relative Strength Index (RSI) compares the size of recent up moves with recent down moves and scales the result from 0 to 100. The standard setting uses 14 candles. Readings above 70 are called overbought and below 30 oversold.
RSI in its own panel. Dips into the 30 zone during an uptrend often mark pullback lows.
The trap: overbought does not mean "about to fall". In a strong uptrend RSI can stay above 70 for weeks. A more reliable approach is to use RSI in the direction of the trend: in an uptrend, buy when RSI dips toward 40 or 30 and turns back up.
- Stochastic: compares the close with the recent high-low range; faster and noisier than RSI.
- Divergence: price makes a new high but RSI does not. A warning that momentum is fading (Level 11).
- The 50 line: RSI above 50 means buyers have had the upper hand recently.
Use oscillators to time entries in the direction of the trend, not to bet against it.
Quick answers
The Relative Strength Index (RSI) compares the size of recent up moves with recent down moves and scales the result from 0 to 100. The standard setting uses 14 candles. Readings above 70 are called overbought and below 30 oversold.
Use oscillators to time entries in the direction of the trend, not to bet against it.
Buyers are strong; overbought can last. Overbought readings can persist in strong trends; they are not sell signals on their own.
Next lesson: MACD