Trader Lab · Technical analysis
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The RSI indicator: measuring overbought and oversold
The Relative Strength Index compares recent gains with recent losses on a scale of 0 to 100. Known as a reversal tool, it keeps traders fighting the trend when used the wrong way.
75%+ of retail investor accounts lose money trading CFDs.
How it works
RSI measures how much of the recent movement came from up moves. Mostly rising candles push it towards 100, mostly falling ones towards 0. The default period is 14.
70 and 30
Above 70 is called overbought, below 30 oversold; some short-term traders use 80 and 20. Read these as "price has moved a lot one way", not "price will turn now".
RSI stays high in strong trends
In a strong uptrend RSI can sit above 70 for days, and selling every cross of 70 is how many traders lose in those phases. Check the trend first with moving averages; in an uptrend, RSI dipping to 40 or 50 and turning up is a more sensible pullback signal.
Divergence
A higher high in price with a lower high in RSI means momentum is fading. Treat it as a warning and wait for price to confirm, for example by breaking the latest swing low.
The 50 line
Above 50 buyers are in control, below it sellers. Used this way, RSI filters trend direction instead of fighting it.
RSI on gold
Gold often trends hard enough to keep RSI in overbought or oversold territory for long stretches, especially after US data. On the 1-hour chart many traders use RSI to confirm fading momentum at support and resistance rather than to decide on its own.
Adding RSI in MT5
- Insert, Indicators, Oscillators, Relative Strength Index.
- Period 14, applied to Close; add levels 70 and 30.
Questions
Can I change the RSI period from 14?
Yes. Shorter is faster with more signals, longer is calmer. Test any change on past data first.
Should I buy when RSI is below 30?
Not on that alone. In downtrends RSI can stay below 30 for long. Wait for a reversal candle or support and set the stop first.
Which timeframe should I use RSI on?
Your trading timeframe plus one above it. If you trade the 1-hour chart, check the 4-hour RSI as well.