What is the RSI indicator and how do you read it?

What RSI measures

RSI looks at the last 14 candles by default. It compares the average size of the up-closes with the average size of the down-closes and turns the result into a number between 0 and 100. When most recent candles closed higher, and by more, RSI is high. When most closed lower, it is low.

It answers one question: how strong has the recent push been? It does not tell you whether price is “too high” or due to turn. RSI is drawn in its own pane below the chart, so you read it alongside the candles.

Overbought, oversold and the midline

• Above 70. Called overbought: buyers have pushed hard. In a range this is often near the top; in a strong uptrend it can stay above 70 for days.
• Below 30. Called oversold: sellers have pushed hard. The same warning applies in a downtrend.
• The 50 midline. In an uptrend, pullbacks often hold RSI around 40 to 50 before the next push. In a downtrend, rallies often stall around 50 to 60.

The midline is often more useful than the extremes. An uptrend where RSI pulls back to the 40s and turns up is a trend that still has momentum.

Divergence

Divergence is when price and RSI disagree. Price makes a higher high, but RSI makes a lower high: the new high came with less push. That is bearish divergence. The mirror, a lower low in price with a higher low in RSI, is bullish divergence.

Divergence is a warning, not an entry. Trends can show divergence several times before they turn, and some never turn at all. Use it as a reason to tighten your plan or skip new trades in that direction, and wait for structure, such as a break of the last higher low, before you act on it.

Using RSI with trend and levels

Here is a setup where RSI adds something. On 4h, EURUSD is in an uptrend above a rising 50 EMA. On 1h, price pulls back into support at 1.0815–1.0820 and RSI dips to about 40, then turns up as a hammer closes on the zone. Trend, level and momentum agree.

Compare that with selling EURUSD only because RSI reads 75 in the same uptrend. That trade fights the structure, and it is a common way to collect small losses. If RSI is the only reason for a trade, there is no trade.

The same logic works in a downtrend: a rally into resistance that pushes RSI up to about 60 and then turns down lines up momentum with structure for a sell.

Size the setup from the stop, as always: at 0.5% risk on a $10,000 account, the most you lose is $50, whatever RSI reads.

Set it up in the Terminal

Open Indicators, go to Oscillators and add RSI. The default length of 14 is the standard most traders watch. The same category holds Stochastic, Stochastic RSI, CCI, Williams %R, Momentum, ROC and Awesome Oscillator. They all measure momentum in slightly different ways, so pick one oscillator and leave the rest; three oscillators on one chart usually say the same thing three times.