RSI - Relative Strength Index
Learn how RSI (Relative Strength Index) works, how to identify overbought/oversold conditions, and how GarudaAlgo uses RSI with divergence detection.
What is RSI?
The Relative Strength Index (RSI) is a momentum oscillator developed by J. Welles Wilder in 1978. It measures the speed and magnitude of recent price changes to evaluate overbought or oversold conditions.
RSI oscillates between 0 and 100, providing traders with a quick visual representation of current market momentum.
RSI = 100 - (100 / (1 + RS))
Where RS = Average Gain / Average Loss (over n periods)
The standard RSI period is 14, meaning it analyzes the last 14 candles to calculate average gains and losses.
How to Interpret RSI
Key Levels
- Above 70 — Overbought territory. Price may be due for a pullback or reversal.
- Below 30 — Oversold territory. Price may be due for a bounce or reversal.
- 50 Level — Centerline. Acts as support in uptrends and resistance in downtrends.
Bullish Signals
- RSI crosses above 30 (leaving oversold)
- RSI bounces off 50 level in uptrend
- Bullish divergence (price lower low, RSI higher low)
Bearish Signals
- RSI crosses below 70 (leaving overbought)
- RSI rejected at 50 level in downtrend
- Bearish divergence (price higher high, RSI lower high)
RSI Divergence
Divergence occurs when price and RSI move in opposite directions. This is one of the most powerful RSI signals:
- Regular Bullish Divergence: Price makes a lower low, but RSI makes a higher low. Indicates potential upward reversal.
- Regular Bearish Divergence: Price makes a higher high, but RSI makes a lower high. Indicates potential downward reversal.
- Hidden Bullish Divergence: Price makes a higher low, RSI makes a lower low. Indicates trend continuation up.
- Hidden Bearish Divergence: Price makes a lower high, RSI makes a higher high. Indicates trend continuation down.
How GarudaAlgo Uses RSI
GarudaAlgo Enhancement
GarudaAlgo doesn't just check if RSI is above 70 or below 30. Our system includes automatic divergence detection for all four divergence types, providing more accurate reversal signals.
RSI Weight in Signal System
RSI analysis contributes 9% to the overall signal confidence score in GarudaAlgo's 13-component weighted system.
What GarudaAlgo Analyzes
- Overbought/Oversold Levels: Standard 70/30 with adjustable thresholds
- Centerline Crosses: Crosses above/below 50
- Regular Divergence: Both bullish and bearish
- Hidden Divergence: For trend continuation signals
- Multi-timeframe RSI: Confirmation across M15, H1, H4
| Parameter | Default Value | Description |
|---|---|---|
| Period | 14 | Number of candles for RSI calculation |
| Overbought Level | 70 | Upper threshold for overbought condition |
| Oversold Level | 30 | Lower threshold for oversold condition |
| Divergence Lookback | 20 | Candles to check for divergence patterns |
Trading Strategies
Strategy 1: Overbought/Oversold Reversal
- Wait for RSI to enter overbought (>70) or oversold (<30) zone
- Wait for RSI to cross back through the threshold
- Enter trade in direction of the cross
- Set stop loss beyond recent swing high/low
Strategy 2: Divergence Trading
- Identify divergence between price and RSI
- Wait for price to confirm reversal (break of minor support/resistance)
- Enter trade in direction of expected reversal
- Target previous swing high/low
Strategy 3: RSI + Trend Following
- Identify overall trend using higher timeframe (H4/Daily)
- In uptrend: Buy when RSI dips to 40-50 zone
- In downtrend: Sell when RSI rises to 50-60 zone
- Use trend direction for trade bias
Best Practices
- Don't trade RSI in isolation — Always confirm with other indicators or price action
- Adjust levels for strong trends — In strong uptrends, RSI can stay above 70 for extended periods
- Use multiple timeframes — Check RSI on higher timeframe for trend context
- Divergence is more powerful than levels — Prioritize divergence signals over simple overbought/oversold
- 14-period is standard, but flexible — Use 7 for faster signals, 21 for smoother readings