RSI Trading Strategy: How To Use RSI Indicator (2024)

An RSI trading strategy is a set of rules and techniques that utilises the RSI indicator to identify potential trading entries based on overbought and oversold conditions or momentum shifts. There are four key ways to use the RSI indicator in trading.

Overbought and oversold

As we have already discussed, if the RSI indicator shows an asset has become overbought and then starts to point lower, it suggests the price might follow it downwards. Likewise, if RSI is oversold and then starts to point higher, the price could be about to turn higher too.

Those following this RSI trading strategy may consider waiting until the RSI falls below the 70 from an overbought condition level to take a possible short position. Then when the RSI rises above 30 from oversold conditions, the idea is to take a long position.

^{*Past performance is not a reliable indicator of future results.}

50-crossover

Traders could use the RSI 50 level (the centreline) to confirm that a price trend is occurring. According to this strategy, a downward trend is confirmed when the RSI crosses from above 50 to below 50. Similarly, an upward trend is confirmed when the RSI crosses above 50.

^{*Past performance is not a reliable indicator of future results.}

Divergence

Another way to trade with RSI is to look for divergence between the RSI and the market price. Put simply, traders are looking for situations when momentum moves in the other direction to the price, signalling a possible turning point.

When the price hits a ‘higher high’ but the RSI makes a ‘lower high’ – this is known as bearish divergence.

When the price makes a ‘lower low’ and the RSI forms a ‘higher low’ – this is known as bullish divergence.

When divergence occurs, the theory states that there is a higher probability of price reversing. This could present potential short-term sell and buy signals.

^{*Past performance is not a reliable indicator of future results.}

RSI failure swings

This is a similar concept to divergence but on a much smaller scale. The ‘swings’ are small highs and lows that a price makes when it is in a trend. The RSI tends to track the highs and lows made in the price.

Uptrends see higher highs and lows. Downtrends see lower highs and lows. If RSI swings lower but the price continues higher, this could be a sign of a short-term trend reversal.

^{*Past performance is not a reliable indicator of future results.}