The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. The RSI oscillates between zero and 100. Conditions are considered overbought above 70, and oversold under 30. 

A common mistake I hear often is a strategy to sell above RSI 70 and buy below RSI 30. Utilizing these conditions can be useful but the RSI is much more reliable in a ranging market. In a trending market, it can send misleading signals. It is a tool to measure the momentum of a trend and identify when it breaks or pulls back. Using the above 70 and below 30 as a buy/sell system is not accurate. 

Things to know

  • When the RSI breaks above 70 in a break out, the bullish trend can definitely continue. Look for a pull back and retest of support. 
  • When the RSI breaks below 30 in a bearish break, the trend can definitely continue as well. Look for a bounce and retest of resistance. 

RSI Divergence

An excellent way to utilize the RSI is to look for divergence. When the RSI trend slopes opposite to that of the price chart trend, a divergence occurs. If the RSI is in overbought or oversold conditions, expect to see a trend reversal. Here is a cheat sheet for you to use at any time. 

Facebook Analysis with RSI

Above weighted moving averages, not over bought, steady series of higher highs and higher lows. A break below the last higher low on both price and RSI would give us an exit signal if we are long.