The RSI value is a tool to read market momentum that traders need to understand.

Why Beginner Traders Use RSI and End Up Losing

This is a question that millions of traders want to know the answer to. Most often, they misunderstand that RSI is used to predict price reversals—buy when it’s low, sell when it’s high. But in reality, professional traders understand RSI much more deeply. They use it to read market momentum, not to predict. This misconception is the main reason many people face losses.

What Is RSI Really?

RSI stands for Relative Strength Index, developed by J. Welles Wilder Jr. in 1978. Its fundamental idea is to measure “momentum”—the speed and magnitude of price changes.

Many people misunderstand the term “Relative Strength.” They think it compares the strength between different assets, like Bitcoin being stronger than Ethereum. But that’s incorrect. The true RSI compares the buying potential and selling potential within the same asset over a given period.

In other words, RSI measures the “average buying force” and “average selling force” of an asset—who is currently leading the market. The result is displayed as a number between 0 and 100, with 50 being the equilibrium point.

Key Modes to Understand: Overbought and Oversold

When you first open an RSI chart, you’ll see two lines at 70 and 30. Most textbooks say:

• 70 and above = Overbought: (Too much buying), consider selling
• 30 and below = Oversold: (Too much selling), consider buying

It sounds simple, but this is a trap that causes traders to lose money.

Why the Traditional 70/30 Strategy Fails

The problem arises from “trends” (Trends) in the market. During a strong uptrend, RSI can stay above 70 for a long time because it reflects strong buying momentum. If you sell every time it hits 70, you’ll be fighting the ongoing trend, leading to losses before the price drops.

Similarly, in a strong downtrend, RSI can stay below 30 for a long time. Buying in this situation is like trying to catch a falling knife.

The 70/30 strategy works well only in sideways markets (range-bound markets). In this scenario, buying near 30 support and selling near 70 resistance yields good results.

How to Calculate the Necessary RSI Values

The main formula is:

RS = Average Gain / Average Loss

RSI = 100 - (100 / (1 + RS))

The most important points to remember:

• If Average Gain > Average Loss, RS > 1 and RSI > 50
• If Average Gain < Average Loss, RS < 1 and RSI < 50
• If Average Gain = Average Loss, RS = 1 and RSI = 50

The 50 line is the true equilibrium point, not 70 or 30.

Professional RSI Usage Techniques

( 1. Divergence – An Effective Early Warning Signal

Bullish Divergence (Bullish Signal):

• Occurs while the price is still falling
• Price makes a new low, but RSI makes a higher low
• Indicates weakening selling pressure and a potential trend reversal to the upside

Bearish Divergence )Bearish Signal###:

• Occurs while the price is still rising
• Price makes a new high, but RSI makes a lower high
• Indicates weakening buying pressure and a potential reversal to the downside

( 2. Failure Swings – Strong Confirmation

This is a confirmation signal from the RSI creator, stronger than divergence.

Failure Swing Top )Bearish Signal(:

• RSI rises above 70 and then falls back
• Price makes a new high, but RSI does not reach 70 again
• Ultimately, RSI drops below its previous low

Failure Swing Bottom )Bullish Signal###:

• RSI drops below 30 and then rises back
• Price makes a new low, but RSI does not reach 30 again
• Ultimately, RSI rises above its previous high

( 3. Use the 50 line as a trend compass

• RSI > 50: Bullish market )Bullish(, focus on buying
• RSI < 50: Bearish market )Bearish###, focus on selling

( 4. Adjust RSI zones according to trend type

In a strong uptrend, RSI typically ranges between 40-90, not 0-100. Therefore, the 40-50 zone is a support area to watch.

In a strong downtrend, RSI usually ranges between 10-60. The 50-60 zone acts as resistance to watch.

Using RSI in Confluence with Other Tools

The solution to all RSI issues is to avoid using it alone. Confirm signals with multiple tools.

RSI + Price Action:

• Not just waiting for RSI to hit 30 and then buy
• Buy when RSI hits 30 and the price reaches a key support level

RSI + MACD:

• MACD confirms the trend
• RSI helps find precise entry points
• When both confirm, the signal is stronger

Limitations of RSI

• False signals: RSI can give false signals in choppy markets
• Lagging indicator: It follows price, not predicting future moves
• Divergence does not guarantee: Warning signals can occur long before actual reversals

Summary

RSI is an excellent momentum indicator, not a reversal predictor. Most mistakes come from misunderstanding, not the tool itself.

The key to success is:

1. Understand momentum, not just sell when overbought
2. Use confirmation from Divergence and Failure Swing
3. Read trend using the 50 line as a reference
4. Adjust RSI zones according to trend type
5. Never rely on a single indicator; use confluence from multiple tools

With this approach, RSI becomes a powerful tool in your trading arsenal.