What is the RSI Indicator and How to Use It?

The Relative Strength Index (RSI) is one of the most frequently used momentum oscillators in technical analysis. Developed by J. Welles Wilder, the RSI measures the speed and change of a stock's price movements. Generally calculated based on a 14-day time frame, the RSI takes a value between 0 and 100. This value tells the investor whether the stock is in the overbought or oversold region. The RSI indicator provides great convenience in predicting the strength of the trend and potential reversal points.

The most basic rule in RSI analysis is the reference levels of 30 and 70. An RSI value rising above 70 shows that the stock is heavily overbought and the price may be saturated in the short term. At these levels, the probability of profit-taking or a correction increases. An RSI value falling below 30 shows that the stock is oversold and the price has cheapened. At these levels, buyers are expected to step in and the price to react upward. However, it should not be thought that a stock entering the overbought or oversold region will immediately change direction; if the trend is strong, the RSI can remain in these regions for a long time.

One of the strongest signals offered by the RSI indicator is 'Divergences'. Divergences between movements on the price chart and movements on the RSI chart are the most reliable early warning signs that the trend will change direction. Positive divergence is the case where new bottoms form on the price chart while higher bottoms form on the RSI chart, signaling that the downtrend is ending and a rise will begin. Negative divergence is when the price makes new highs while the RSI makes lower highs, indicating that the uptrend is weakening and a decline may be approaching.

Another popular method when using RSI is taking the 50 level as a reference. The RSI value rising above 50 shows that bull (upward) momentum is strengthening, while falling below 50 shows that bear (downward) momentum is becoming dominant. Waiting for the RSI to cross the 50 level upward before buying a stock can mean that the trend is confirmed. Combining these signals offered by the RSI with trading volume and price formations (e.g., double bottom or double top) seriously increases the chance of success.

In the chart analyses we share on our Sermaye Borsasi Telegram channel, we detect RSI divergences instantly and transmit them to our investors. You can also query the instant RSI value of any stock you want in seconds through our depth bot, and list companies that are in overbought or oversold zones. The RSI is a very powerful compass that should be in every investor's toolbox. As Sermaye Borsasi, we advise our investors to integrate this indicator into their strategies correctly.