What You'll Learn in This Section:
- What RSI is and what it actually measures (in simple terms)
- The RSI scale (0 to 100) and what the numbers mean
- Default settings: 14-period RSI and the 70/30 zones
- How to read RSI correctly (above 70, below 30, near 50)
- The BIG mistake beginners make with overbought/oversold levels
- Why RSI can stay "overbought" or "oversold" for a long time
- How to use RSI in ranging vs trending markets
- RSI divergence basics (advanced warning signals)
- How to combine RSI with your Moving Average for better trades
4.1 What Is RSI? (Simple Explanation)
Let's start with the basics.
RSI stands for Relative Strength Index.
It's a momentum oscillator that measures the speed and strength of price movements.
What does that mean in plain English?
RSI answers this question: "How strongly has price been moving up or down recently?"
That's it.
🌡️ Thermometer for Momentum
Think of RSI like a thermometer for momentum:
- When RSI is high (like 80 or 90), it means price has been moving up strongly recently
- When RSI is low (like 20 or 10), it means price has been moving down strongly recently
- When RSI is in the middle (around 50), momentum is neutral—no strong pressure in either direction
RSI only tells you what has been happening with momentum lately.
Just like a thermometer tells you it's hot outside right now—but doesn't tell you what the weather will be tomorrow.
How Is RSI Calculated?
You don't need to memorize this, but here's the basic idea:
RSI looks at the gains and losses over a certain number of candles (usually 14).
RSI = 100 - (100 ÷ (1 + RS))
Where RS = Average Gain ÷ Average Loss
What this means:
- If price has been going up more than down over the last 14 candles → RSI will be high (above 50)
- If price has been going down more than up → RSI will be low (below 50)
- If price has been balanced → RSI will be around 50
RSI is calculated from recent price action. It's a lagging indicator, just like the Moving Average.
It summarizes what already happened—it doesn't predict the future.
4.2 The RSI Scale: 0 to 100
RSI is displayed as a line that moves between 0 and 100.
It appears in a separate panel below your main price chart.
Let's break down what the different levels mean:
RSI Zones and What They Tell You
The Three Key Zones to Remember
1. RSI Above 70 = Overbought
What it means: Price has been moving up strongly for a while. Buying pressure has been intense.
What beginners think: "Overbought means it's too expensive! Time to sell!"
The truth: "Overbought" just means momentum is strong to the upside. It does NOT automatically mean price will reverse or fall.
In fact, in strong uptrends, RSI can stay above 70 for days or even weeks as price keeps climbing.
🏃 Running Uphill Analogy
If you're running uphill and your heart rate is 170 (very high), does that mean you'll immediately collapse?
No. You might keep running at that pace for a while if you're fit.
RSI above 70 is like a high heart rate—it shows strong exertion, but not necessarily exhaustion.
2. RSI Below 30 = Oversold
What it means: Price has been moving down strongly for a while. Selling pressure has been intense.
What beginners think: "Oversold means it's too cheap! Time to buy!"
The truth: "Oversold" just means momentum is strong to the downside. It does NOT automatically mean price will reverse or bounce.
In strong downtrends, RSI can stay below 30 for days or weeks as price keeps falling.
🛒 Sale Shopping Analogy
If something is on sale for 50% off, does that mean it's a good deal?
Not if the company is going bankrupt and the product will be 90% off next week.
RSI below 30 shows strong selling pressure, but not necessarily a bottom.
3. RSI Around 50 = Neutral
What it means: Momentum is balanced. No strong buying or selling pressure.
What to do: When RSI hovers around 50, it often means:
- The market is ranging (moving sideways)
- Or price is consolidating before the next move
This is a "wait and see" zone. Don't force trades when momentum is unclear.
4.3 Default Settings: The 14-Period RSI
When you add RSI to your TradingView chart, the default setting is usually 14 periods.
This means RSI calculates the average gains and losses over the last 14 candles.
Why 14?
J. Welles Wilder Jr., the creator of RSI, tested many settings and found that 14 periods gave the best balance:
- Not too fast (like 7 periods, which is too jumpy)
- Not too slow (like 28 periods, which is too smooth and delayed)
Should you change this setting?
For beginners: No. Stick with 14.
It's the standard used by millions of traders worldwide. This means:
- Educational materials use 14
- Trading strategies use 14
- Other traders are watching the same levels you are
Once you're advanced, you can experiment with 9, 21, or other periods. But for now, leave it at 14.
The 70/30 Lines (Overbought/Oversold Reference)
When you add RSI to TradingView, you'll see two horizontal lines on the indicator:
- Upper line at 70 (overbought reference)
- Lower line at 30 (oversold reference)
These are just visual guides—not magic levels.
Some traders use different levels:
- 80/20 (more extreme zones)
- 75/25 (slightly wider zones)
But 70/30 is the standard. Stick with it.
4.4 How to Read RSI Correctly
Now that you understand what RSI shows, let's learn how to interpret it in real trading situations.
Reading 1: RSI Above 50 = Bullish Momentum
When RSI is above the 50 line, it means:
- Recent price action has been more up than down
- Buyers have had the upper hand
- Momentum is bullish
What to do:
- In a trending market, RSI above 50 confirms the uptrend
- If you're already in a long position, this is reassuring—momentum supports your trade
- If you're looking to enter, wait for a pullback (price dips toward the MA) while RSI stays above 50—this suggests healthy momentum even during the dip
EURUSD is in an uptrend on the 4H chart (price above the 50 SMA).
RSI is at 60—above 50, but not overbought yet.
Interpretation: "Momentum is bullish. The uptrend is healthy. I should look for buy opportunities on pullbacks."
Reading 2: RSI Below 50 = Bearish Momentum
When RSI is below the 50 line, it means:
- Recent price action has been more down than up
- Sellers have had the upper hand
- Momentum is bearish
What to do:
- In a downtrend, RSI below 50 confirms the downtrend
- This tells you: "Don't fight this. The momentum is against you if you try to buy."
- If you're looking to short-sell (or avoid buying), this is your confirmation
BTCUSD is in a downtrend on the daily chart (price below the 200 SMA).
RSI is at 40—below 50, but not oversold yet.
Interpretation: "Momentum is bearish. The downtrend is still active. I should avoid buying right now."
Reading 3: RSI Above 70 = Strong Upward Momentum (NOT Always a Sell Signal)
When RSI crosses above 70, it means:
- Price has been rising strongly
- Buying pressure is intense
- The market is "hot"
What beginners do wrong:
They see RSI above 70 and think: "It's overbought! Time to sell!"
Then they short the market or close their long positions...
...and price keeps rising. RSI stays above 70 for days. They miss the entire move.
The correct interpretation:
RSI above 70 means STRENGTH, not weakness.
In a strong uptrend, RSI can stay overbought for a long time.
Bitcoin goes on a bull run. RSI hits 75 and stays there for two weeks. Price climbs from $40,000 to $60,000 during that time.
Traders who sold "because it's overbought" missed a 50% gain.
The right approach:
- In an uptrend: RSI above 70 is normal and healthy. Don't sell just because of this.
- In a ranging market: RSI hitting 70 might signal a pullback is coming (more on this later).
When to be cautious:
If RSI goes extremely high (like 85-95) and stays there, it can signal overextension—price might consolidate or pull back soon.
But even then, it's not an automatic sell signal. Just a warning to be prepared.
Reading 4: RSI Below 30 = Strong Downward Momentum (NOT Always a Buy Signal)
When RSI crosses below 30, it means:
- Price has been falling strongly
- Selling pressure is intense
- The market is "cold"
What beginners do wrong:
They see RSI below 30 and think: "It's oversold! Time to buy!"
Then they buy at what they think is a "discount"...
...and price keeps falling. RSI stays below 30 for days. Their account bleeds.
The correct interpretation:
RSI below 30 means WEAKNESS, not strength.
In a strong downtrend, RSI can stay oversold for a long time.
A stock crashes due to bad news. RSI drops to 25 and stays there for a month. Price falls from $100 to $50 during that time.
Traders who bought "because it's oversold" caught a falling knife.
The right approach:
- In a downtrend: RSI below 30 is normal and expected. Don't buy just because of this.
- In a ranging market: RSI hitting 30 might signal a bounce is coming (more on this later).
When to look for opportunities:
If RSI goes extremely low (like 15-20) and then starts turning back up toward 30, it can signal exhaustion—sellers might be running out of steam.
But you still need confirmation from price action (like a bullish candle at support).
Reading 5: RSI Crossing 50 (Momentum Shifts)
One of the most useful signals from RSI is when it crosses the 50 line.
Bullish momentum shift:
When RSI crosses from below 50 to above 50, it suggests:
- Momentum is shifting from bearish to bullish
- Buyers are starting to take control
- This can confirm a trend change or the start of a new uptrend
Bearish momentum shift:
When RSI crosses from above 50 to below 50, it suggests:
- Momentum is shifting from bullish to bearish
- Sellers are starting to take control
- This can confirm a trend change or the start of a new downtrend
How to use this:
Combine the 50-line cross with your Moving Average.
EURUSD has been in a downtrend (price below the 50 SMA, RSI below 50).
Then:
- Price breaks above the 50 SMA
- RSI crosses above 50
Both indicators confirm: "Momentum is shifting. The downtrend might be over. Time to look for long opportunities."
This is confluence—when multiple tools agree.
4.5 The BIG Mistake Beginners Make: Treating Overbought/Oversold as Automatic Signals
Let's address the biggest misconception about RSI.
The Mistake:
Beginners learn: "RSI above 70 = overbought = sell signal."
So they blindly sell every time RSI hits 70.
Or: "RSI below 30 = oversold = buy signal."
So they blindly buy every time RSI hits 30.
The Result:
They get destroyed in trending markets.
Why This Approach Fails
In strong trends, RSI can stay overbought or oversold for a LONG time.
Example 1: Uptrend
Bitcoin enters a bull market. Price climbs from $20,000 to $60,000 over several months.
During this time, RSI stays above 70 for weeks at a time.
If you sold every time RSI hit 70, you would have:
- Missed the entire rally
- Sold way too early
- Lost money trying to short a bull market
Example 2: Downtrend
A stock collapses after a scandal. Price falls from $80 to $20 over several months.
During this time, RSI stays below 30 for weeks.
If you bought every time RSI hit 30, you would have:
- Caught multiple falling knives
- Lost money on every "oversold bounce" that failed
- Watched your account shrink
The Correct Mindset
Overbought does NOT mean "time to sell."
Oversold does NOT mean "time to buy."
Instead, think of it like this:
RSI above 70 = "Momentum is very strong to the upside. If I'm in a long trade, I hold. If I'm looking to enter, I wait for a healthy pullback—but I don't fight this strength."
RSI below 30 = "Momentum is very strong to the downside. If I'm in a short trade, I hold. If I'm looking to enter short, I wait for a bounce to resistance—but I don't try to catch a falling knife."
RSI tells you the current momentum state—not what to do next.
4.6 Why RSI Stays Overbought/Oversold in Strong Trends
Let's understand why this happens.
In a Strong Uptrend:
- Price is consistently making higher highs and higher lows
- Most candles are closing green (bullish)
- The average gain over 14 periods is much larger than the average loss
- This pushes RSI above 70 and keeps it there
Imagine 12 out of the last 14 candles are green, and only 2 are red.
The math behind RSI will calculate a very high value—because gains are dominating.
This is normal in trends. It's not a "signal to sell"—it's a confirmation of strength.
In a Strong Downtrend:
- Price is consistently making lower highs and lower lows
- Most candles are closing red (bearish)
- The average loss over 14 periods is much larger than the average gain
- This pushes RSI below 30 and keeps it there
Imagine 12 out of the last 14 candles are red, and only 2 are green.
RSI will calculate a very low value—because losses are dominating.
Again, this is normal in trends. It's not a "buy signal"—it's a confirmation of weakness.
Don't trade AGAINST overbought/oversold zones in trending markets.
Instead, use them to confirm the trend is strong.
- If you're in an uptrend and RSI goes overbought → Good! The trend is powerful.
- If you're in a downtrend and RSI goes oversold → Good! The trend is powerful.
Only consider overbought/oversold as reversal zones in RANGING markets (which we'll cover next).
4.7 How to Use RSI in Ranging vs Trending Markets
This is the key to using RSI correctly. The strategy changes depending on whether the market is trending or ranging.
A. Using RSI in a RANGING Market
What's a ranging market? A market that's moving sideways between a support and resistance level.
How to recognize it:
- Price bounces back and forth between two horizontal levels
- The Moving Average is flat (not sloping up or down)
- No clear trend
In a ranging market, RSI overbought/oversold levels WORK better as reversal signals.
Why? Because in a range, price tends to:
- Rally up to resistance, get rejected, and fall back down
- Drop down to support, bounce, and rally back up
How to Use RSI in a Range:
- RSI hits 70 (overbought) near resistance → Look for a short-sell or avoid buying
- RSI hits 30 (oversold) near support → Look for a buy opportunity
GBPUSD is ranging between 1.2500 (support) and 1.2700 (resistance).
Price rallies to 1.2690, RSI hits 72.
Setup: "We're at the top of the range, RSI is overbought. This is a potential short-sell setup."
You wait for a bearish candle to confirm, then enter a short trade with a stop loss just above 1.2700.
In ranges, overbought/oversold signals are more reliable.
B. Using RSI in a TRENDING Market
What's a trending market? A market that's moving in a clear upward or downward direction.
How to recognize it:
- Price is making higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend)
- The Moving Average is sloping up or down
- Price stays above (uptrend) or below (downtrend) the MA
In a trending market, RSI overbought/oversold levels DO NOT work as reversal signals.
Instead, use RSI to confirm momentum and find pullback entries.
In an UPTREND:
Strategy:
- Confirm the trend: Price above the 50 SMA, RSI above 50
- Wait for a pullback (price dips toward the MA)
- Check RSI: If RSI pulls back to 40-50 (but stays above 30), momentum is still healthy
- Enter a long trade when price bounces off the MA
Why this works:
During healthy uptrends, RSI will dip during pullbacks, but it usually doesn't go oversold. If RSI stays above 40 during a pullback, it means: "This is just a normal pause. The uptrend is intact."
What to avoid:
Don't sell just because RSI hits 70. In uptrends, RSI often stays between 60-80.
In a DOWNTREND:
Strategy:
- Confirm the trend: Price below the 50 SMA, RSI below 50
- Wait for a bounce (price rallies toward the MA)
- Check RSI: If RSI bounces to 50-60 (but stays below 70), momentum is still weak
- Enter a short trade when price gets rejected by the MA
Why this works:
During healthy downtrends, RSI will bounce during rallies, but it usually doesn't go overbought. If RSI stays below 60 during a rally, it means: "This is just a temporary bounce. The downtrend is intact."
What to avoid:
Don't buy just because RSI hits 30. In downtrends, RSI often stays between 20-40.
Quick Reference: RSI in Ranges vs Trends
4.8 RSI Divergence: Advanced Warning Signals
Now let's cover a more advanced concept: RSI divergence.
This is when RSI and price disagree—and it can warn you that momentum is weakening.
What Is Divergence?
Divergence happens when:
- Price makes a new high, but RSI makes a lower high
- OR price makes a new low, but RSI makes a higher low
This suggests that momentum is not confirming the price move—a warning sign.
A. Bearish Divergence (Warning of Weakness)
What it looks like:
- Price makes a higher high (new peak)
- But RSI makes a lower high (doesn't reach the previous RSI peak)
What it means:
Price is still going up, but momentum is weakening. Buyers are losing steam. The rally might be running out of energy.
EURUSD is in an uptrend. Price rises to 1.1200, and RSI hits 80.
Then price pulls back and rallies again to 1.1250 (a new high).
But this time, RSI only reaches 75 (lower than the previous 80).
Interpretation: "Price made a higher high, but momentum is weaker. This uptrend might be losing strength. Be cautious."
What to do:
- If you're in a long trade, consider tightening your stop loss or taking partial profits
- Don't immediately short—divergence is a warning, not a signal
- Wait for price to break below support or the MA before entering a short trade
Bearish divergence doesn't guarantee a reversal—it just warns you to be alert.
B. Bullish Divergence (Warning of Strength Building)
What it looks like:
- Price makes a lower low (new bottom)
- But RSI makes a higher low (doesn't reach the previous RSI low)
What it means:
Price is still going down, but selling pressure is weakening. Sellers are losing steam. The downtrend might be running out of energy.
BTCUSD is in a downtrend. Price falls to $25,000, and RSI hits 25.
Then price bounces and falls again to $24,000 (a new low).
But this time, RSI only drops to 30 (higher than the previous 25).
Interpretation: "Price made a lower low, but momentum is less bearish. This downtrend might be losing strength. A reversal could be near."
What to do:
- If you're in a short trade, consider tightening your stop loss or taking profits
- Don't immediately buy—divergence is a warning, not a signal
- Wait for price to break above resistance or the MA before entering a long trade
Bullish divergence doesn't guarantee a reversal—it just suggests selling pressure is fading.
How to Spot Divergence on Your Chart
- Step 1: Identify two recent peaks (in an uptrend) or two recent lows (in a downtrend)
- Step 2: Draw a line connecting the two price peaks (or lows)
- Step 3: Draw a line connecting the two RSI peaks (or lows) at the same time
- Step 4: Compare the lines:
- If price line slopes up but RSI line slopes down → Bearish divergence
- If price line slopes down but RSI line slopes up → Bullish divergence
TradingView has drawing tools. You can use the trendline tool to draw these lines on both your price chart and RSI panel.
⚠️ Divergence is NOT a standalone signal.
Just because you see divergence doesn't mean you should immediately trade. Why?
- Divergence can appear early—price might continue trending for days or weeks before reversing
- Divergence can be false—price might make one more push in the trend direction before reversing
- Divergence needs confirmation from other tools (price breaking support/resistance, MA cross, candlestick patterns)
Use divergence as an ALERT, not a TRADE SIGNAL.
🔔 Smoke Detector Analogy
Divergence is like a smoke detector:
It warns you: "Hey, something might be wrong here. Pay attention."
But you still need to investigate before taking action.
4.9 Combining RSI with Your Moving Average (Powerful Setup)
Now let's put it all together: RSI + Moving Average. This is where your analysis becomes multilayered and high-probability.
The 3-Step Filter System
Here's a simple, powerful approach:
Step 1: Check the Trend (Moving Average)
Is price above or below the 50 SMA?
This tells you the direction bias (bullish or bearish)
Step 2: Check Momentum (RSI)
Is RSI above or below 50?
This confirms whether momentum supports the trend
Step 3: Wait for a High-Probability Setup
- In an uptrend: Wait for a pullback to the MA with RSI staying above 40
- In a downtrend: Wait for a bounce to the MA with RSI staying below 60
Only trade when all three layers align.
Example 1: Bullish Setup (Uptrend Pullback)
Market: EURUSD, 4H chart
Step 1: Trend Check (MA)
- Price is above the 50 SMA
- The 50 SMA is sloping upward
- Conclusion: Uptrend confirmed
Step 2: Momentum Check (RSI)
- RSI is above 50 (currently at 58)
- Conclusion: Bullish momentum confirmed
Step 3: Wait for Entry Setup
- Price pulls back (a few red candles)
- Price touches or gets close to the 50 SMA
- RSI dips to 45 (still above 40—healthy)
- A bullish candle closes above the MA
All signals align → This is a HIGH-PROBABILITY buy setup.
Trading Plan:
- Entry: Buy at the close of the bullish confirmation candle
- Stop Loss: Place it just below the MA (maybe 20-30 pips below)
- Take Profit: Target the next resistance level or a 1:2 risk-reward ratio
Example 2: Bearish Setup (Downtrend Bounce)
Market: BTCUSD, Daily chart
Step 1: Trend Check (MA)
- Price is below the 200 SMA
- The 200 SMA is sloping downward
- Conclusion: Downtrend confirmed
Step 2: Momentum Check (RSI)
- RSI is below 50 (currently at 42)
- Conclusion: Bearish momentum confirmed
Step 3: Wait for Entry Setup
- Price bounces (a few green candles)
- Price rallies up toward the 200 SMA
- RSI bounces to 55 (still below 60—weak)
- A bearish candle closes below the MA
All signals align → This is a HIGH-PROBABILITY short-sell setup.
Trading Plan:
- Entry: Sell at the close of the bearish confirmation candle
- Stop Loss: Place it just above the MA
- Take Profit: Target the next support level or a 1:2 risk-reward ratio
Because it's based on CONFLUENCE—multiple tools agreeing.
When:
- Trend (MA) says "uptrend"
- Momentum (RSI) says "strong"
- Price action says "pullback complete, bounce confirmed"
...you have a high-probability setup.
You're not relying on one indicator. You're stacking evidence. This is how professionals trade.
4.10 Common Mistakes When Using RSI (And How to Avoid Them)
Let's make sure you don't fall into these beginner traps.
❌ Mistake #1: Buying Every Oversold Signal
The trap: RSI drops below 30 → "It's oversold! Time to buy!"
The reality: In a downtrend, RSI can stay oversold for weeks. You'll catch falling knives.
The fix: Only consider oversold as a buy signal in RANGING markets or when the trend has already reversed (price breaks above the MA, RSI crosses above 50).
❌ Mistake #2: Selling Every Overbought Signal
The trap: RSI rises above 70 → "It's overbought! Time to sell!"
The reality: In an uptrend, RSI can stay overbought for weeks. You'll miss huge rallies.
The fix: Only consider overbought as a sell signal in RANGING markets or when the trend has already reversed (price breaks below the MA, RSI crosses below 50).
❌ Mistake #3: Ignoring the Trend
The trap: Using RSI alone without checking the Moving Average.
The reality: RSI tells you momentum, but not direction. You need both.
The fix: Always check the MA first. If the trend is up, focus on buying opportunities. If it's down, focus on selling. Never trade RSI signals that contradict the trend.
❌ Mistake #4: Trading Every Divergence
The trap: Spotting divergence and immediately entering a trade.
The reality: Divergence can appear long before price actually reverses. You might be early and get stopped out.
The fix: Use divergence as an ALERT, not a SIGNAL. Wait for: Price to break a key support/resistance level, a trend line break, a candlestick pattern, the MA to start turning. Confirmation is key.
❌ Mistake #5: Changing the RSI Settings Too Much
The trap: Constantly tweaking RSI to 7, 21, 9, 50, trying to "optimize" it.
The reality: Every setting works sometimes and fails sometimes. Consistency beats optimization.
The fix: Stick with 14 periods. It's the standard. Learn it deeply before experimenting.
❌ Mistake #6: Overcomplicating the Indicator Panel
The trap: Adding RSI + MACD + Stochastic + CCI + 5 other momentum indicators.
The reality: They all measure similar things. You'll get conflicting signals and confusion.
The fix: Pick ONE momentum indicator (RSI or MACD—we'll cover MACD next) and master it. Don't clutter your chart with redundant tools.
Let's recap everything you've learned about RSI:
- What it is: A momentum oscillator (0-100 scale) that measures the speed and strength of recent price movements
- How it's calculated: Based on average gains vs average losses over 14 periods (default setting)
- Key zones: Above 70 = Overbought (strong upward momentum) | Below 30 = Oversold (strong downward momentum) | Around 50 = Neutral (balanced momentum) | Above 50 = Bullish momentum | Below 50 = Bearish momentum
- The BIG mistake: Treating overbought (70) and oversold (30) as automatic "sell" and "buy" signals. They're not.
- Why this fails: In strong trends, RSI can stay overbought or oversold for days or weeks. It's confirming trend strength, not predicting reversals.
- How to use RSI correctly: In trending markets: Use RSI to confirm momentum and find healthy pullbacks (not to fight the trend) | In ranging markets: Use overbought/oversold zones as potential reversal signals near support/resistance
- RSI divergence: When price makes a new high but RSI makes a lower high (bearish divergence) or price makes a new low but RSI makes a higher low (bullish divergence). This warns of weakening momentum—but needs confirmation.
- Combining RSI + MA: The most powerful approach—use the MA to identify trend direction, then use RSI to confirm momentum and time entries
- Common mistakes to avoid: Buying every oversold signal | Selling every overbought signal | Ignoring the trend | Trading divergence without confirmation | Changing settings constantly | Adding too many momentum indicators
- The right mindset: RSI is a momentum thermometer. It tells you what's happening with momentum right now—not what will happen next. Use it as confirmation, not prediction.
Practice Tasks (Complete These Before Moving On!)
- Open TradingView
- Go to BTCUSDT on a 1D (Daily) timeframe
- Make sure you have the 50 SMA already on the chart (from Section 3)
- Click "Indicators" and search for "RSI"
- Add "Relative Strength Index" (the default one from TradingView)
- A panel will appear below your chart showing the RSI line
- Check the settings: It should be set to 14 periods. Leave it as is
- Save your layout
- Look at your BTCUSDT chart right now
- Answer these questions: What is the current RSI value? (Look at the number in the RSI panel) | Is RSI above 70, below 30, or between them? | Is RSI above or below 50? | Based on RSI alone, would you say momentum is bullish, bearish, or neutral?
- Write down your answers
- Now look at both the 50 SMA and RSI together
- Answer: Is Bitcoin price above or below the 50 SMA? | Is RSI above or below 50? | Do they agree (both bullish or both bearish) or disagree?
- If they agree: You have confirmation—trend and momentum align
- If they disagree: The market might be transitioning or ranging—be cautious
- Scroll back through the Bitcoin chart (last 6-12 months)
- Find at least 2 examples where: RSI went above 70 (overbought) during an uptrend, and price kept rising | Or RSI went below 30 (oversold) during a downtrend, and price kept falling
- Mark these spots
- This exercise shows you: Overbought/oversold does NOT mean automatic reversal
- Change your symbol to EURUSD
- Set the timeframe to 4H
- Keep the 50 SMA and RSI on the chart
- Answer: Is EURUSD in an uptrend or downtrend? (Check the MA) | Is RSI confirming this? (Above or below 50?) | Is there a recent pullback where RSI dipped but stayed healthy (above 40 in an uptrend)?
- On your BTCUSD daily chart, scroll back and look for divergence
- Try to find: One example of bearish divergence (price higher high, RSI lower high) | One example of bullish divergence (price lower low, RSI higher low)
- Use the trendline tool to draw lines connecting the peaks (or lows) on both price and RSI
- Don't worry if this is hard—it takes practice. Divergence is an advanced concept
- In your trading notebook, write: "Today I learned that RSI..."
- Complete the sentence with 3-5 key takeaways
- Example: "Today I learned that RSI shows momentum, not prediction. Overbought doesn't mean sell—it can stay high in uptrends. I should check the trend (MA) first, then use RSI for confirmation."
- 💭 "Have I been treating overbought/oversold as automatic signals? Do I understand now why that's wrong?"
- 💭 "Can I see the difference between using RSI in a trending market vs a ranging market?"
- 💭 "Am I checking BOTH the MA and RSI before making a trade decision, or am I relying on just one?"
Take a moment to reflect. Self-awareness leads to growth.
You've just mastered one of the most popular and powerful momentum indicators in trading.
You now understand:
- What RSI actually measures (momentum, not prediction)
- Why overbought/oversold are NOT automatic signals
- How to use RSI differently in trending vs ranging markets
- How to spot divergence (advanced warning signals)
- How to combine RSI with your Moving Average for high-probability setups
You're no longer a beginner blindly following "overbought = sell" rules.
You're thinking like a professional trader—using RSI as a confirmation tool within a complete system.
In Section 5, we'll introduce the third indicator: MACD (Moving Average Convergence Divergence).
MACD is similar to RSI (it's also a momentum indicator), but it shows momentum in a different way—using two moving averages and a histogram.
You'll learn:
- What MACD shows and how to read it
- The MACD line, signal line, and histogram
- MACD crossovers and what they mean
- When to use MACD vs RSI (and when to use both)
By the end of Section 5, you'll have three powerful tools in your arsenal:
- Moving Average (trend direction)
- RSI (momentum strength)
- MACD (momentum + trend confirmation)
And you'll know how to combine them into a complete trading system.
You're building real, professional skills. Keep going—you're doing incredibly well.
See you in Section 5! 💪📈