RSI
Explaining the RSI (Relative Strength Index)
What RSI is, why traders use it, the exact formula, default and alternative settings, RSI trendlines, multi-period cross method (RSI-5 vs RSI-14), classical divergence, and practical day-trading configurations.
Momentum
Entry & Exit
Department
OTM Academy
Category
Technical analysis
What Is RSI?
The Relative Strength Index (RSI), created by J. Welles Wilder, measures the ratio of up moves to down moves and expresses it on a 0–100 scale.
• RSI ≥ 70 → potential overbought conditions.
• RSI ≤ 30 → potential oversold conditions.
RSI is a leading momentum oscillator that helps identify trend strength, exhaustion, and potential reversals.
RSI Formula (Exactly)
Compute the average gain and average loss over N periods (Wilder’s smoothing), divide gain by loss to get RS, then index to 0–100 using: RSI = 100 − (100 / (1 + RS)). In MT5, drag RSI onto the main chart; the default period is 14.
Technical Analysis Principles Behind RSI
• Trend is your friend: RSI helps confirm whether price momentum supports the prevailing trend.
• History repeats: Recurrent RSI patterns (OB/OS, failure swings, divergences) reflect persistent market psychology.
• Price discounts everything: RSI distills supply/demand and sentiment into a single momentum line.
Best RSI Settings & Core Strategies
Default period 14 works well for most markets. Adjust period and thresholds to suit your timeframe and noise. Combine RSI with structure/levels for confirmation.
Two-Period Crossover (RSI-5 vs RSI-14)
Overlay RSI-5 on RSI-14 and watch crossovers:
• Bullish signal: RSI-5 crosses above RSI-14, ideally from sub-30 conditions.
• Bearish signal: RSI-5 crosses below RSI-14, ideally from above-70 conditions.
This increases sensitivity and can flag earlier reversals. Many traders add Pivot Points for levels.
RSI Divergence, Day-Trading Settings & Wrap-Up
RSI Trendlines: Connect RSI highs/lows; a break can signal continuation or reversal and often leads price.
Classical Divergence:
• Bearish: Price makes a higher high while RSI prints a lower high → reversal risk from an up-move.
• Bullish: Price makes a lower low while RSI prints a higher low → reversal potential from a down-move.
Day-Trading Periods:
• Short-term/intraday: RSI 9–11 (more signals).
• Swing: RSI 14 (default).
• Position/longer-term: RSI 20–30 (smoother).
Execution Tips:
• Use RSI with structure (support/resistance, pivots) and a trigger (break/retest or candle pattern).
• Add risk rules: stop beyond structure or 1–1.5× ATR; targets 1.5–2.5× ATR or next level.
Bottom line: When understood and applied correctly, RSI identifies trend health, OB/OS conditions, high-quality entries/exits, and active timeframes. Practice your chosen RSI settings on a demo first, then go live with the exact same rules.
