What is RSI?
The Relative Strength Index (RSI) is a momentum oscillator built by J. Welles Wilder Jr. in 1978. It compares the magnitude of recent gains to recent losses on a 0–100 scale and is the second-most-used indicator in retail trading after moving averages.
Default settings: 14-period lookback. Overbought above 70, oversold below 30. The classic interpretation: long when oversold, short when overbought.
How RSI works
Mechanically, RSI is computed from average gain and average loss over the lookback window:
# Wilder's RSI · 14-period default RS = avg_gain(14) / avg_loss(14)
RSI = 100 − ( 100 / (1 + RS) )
# Wilder smoothing (not simple MA) avg_gain[t] = ( avg_gain[t-1] × 13 + gain[t] ) / 14 Setup — RSI on TradingView / MT4
On TradingView: search "RSI" → defaults are correct. On MT4: Insert → Indicators → Oscillators → Relative Strength Index. Use the 14-period default.
Buy / sell rules
Establish trend on higher timeframe
RSI signals work better in trends than in chop. Mark the daily structure first — higher highs / lower lows.
Wait for oversold (long) or overbought (short)
RSI < 30 in an uptrend = potential long. RSI > 70 in a downtrend = potential short. Counter-trend signals are traps, not opportunities.
Confirm with structure
Price must hold a prior support (long) or fail at prior resistance (short). RSI alone gets you stopped out.
Enter on RSI cross-back through 30 / 70
Don't enter on touch — wait for the bar that closes back above 30 (or below 70). Stop goes one ATR beyond the swing.
Manage with R-multiple targets
TP1 at 1R (move stop to break-even). TP2 at 2R. Trail the rest with the 21 EMA.
Worked example on AUD/USD
Daily structure was bullish above support. Price pulled back to the 50-day MA with RSI tagging 28. The next 4H bar closed back above 30. Long entry, stop one ATR below swing, TP1 at 1R (move stop to break-even), TP2 at 2R.
RSI is a measurement, not a forecast. It tells you what just happened — your structure tells you what might happen next.
Common mistakes
- Trading RSI counter-trend in strong moves — RSI can stay above 70 for 30+ bars in a parabolic move.
- Ignoring the timeframe — 1-minute RSI is noise; daily RSI is signal.
- Treating RSI as binary (buy at 30, sell at 70) instead of as a confirmation overlay.
- Ignoring spread and pip-value math — see our pip calculator.
When NOT to use RSI
Yen pairs in BOJ-intervention windows. Crypto majors during liquidations. Anything within 30 minutes of US CPI / NFP. RSI is calibrated to "normal" volatility — extreme moves break the assumption.
Practice this strategy risk-free
FxPro demo accounts are unlimited time. Test the rules above on AUD/USD before going live.