RSI (Relative Strength Index)
Technical IndicatorsA momentum oscillator that measures the speed and magnitude of recent price changes on a scale of 0 to 100. Readings above 70 suggest overbought conditions; below 30 suggest oversold conditions.
What Is the RSI?
The Relative Strength Index (RSI), developed by J. Welles Wilder in 1978, compares the magnitude of recent gains to recent losses over a default period of 14. The result oscillates between 0 and 100. When RSI exceeds 70, the pair is considered overbought, meaning it may have risen too fast and could pull back. Below 30 indicates oversold conditions, suggesting a potential bounce. The RSI does not measure overbought/oversold in an absolute sense; it measures the intensity of recent momentum.
How to Use RSI in Forex
The simplest approach is to look for long entries when RSI drops below 30 and turns back up, and short entries when RSI rises above 70 and turns back down. A more powerful technique is RSI divergence: when price makes a new high but RSI makes a lower high, it signals weakening momentum and a potential reversal. This works on any pair and timeframe, though the daily chart produces the most reliable signals on EUR/USD, GBP/USD, and USD/JPY.
RSI Settings and Variations
While 14 periods is standard, shorter settings (7 or 9) increase sensitivity for scalping, and longer settings (21 or 25) smooth out signals for swing trading. Some traders use 80/20 instead of 70/30 as thresholds to filter out weaker signals. RSI pairs well with trend-following indicators like Moving Average or MACD (Moving Average Convergence Divergence): use the MA to identify trend direction and RSI to time entries with the trend.
Related Terms
Stochastic Oscillator
A momentum indicator that compares a currency pair's closing price to its price range over a set number of periods. It generates %K and %D lines that oscillate between 0 and 100, with readings above 80 considered overbought and below 20 oversold.
MACD (Moving Average Convergence Divergence)
A trend-following momentum indicator that shows the relationship between two exponential moving averages. The MACD line, signal line, and histogram together help identify trend direction, momentum shifts, and potential entry points.