Recently, a friend asked me how to use RSI. Actually, this indicator is a fundamental tool that every beginner must learn. In simple terms, RSI is used to measure the short-term momentum of market rises and falls. Its value fluctuates between 0 and 100, helping you quickly determine whether the market is overheated or oversold.

Let me start with the most practical part. When RSI exceeds 70, the market is usually in an overly optimistic state, and you should be cautious of a pullback risk; conversely, when RSI drops below 30, the market may be overly pessimistic, and a rebound could be coming. I call these two zones overbought and oversold, and you can judge them just by looking at the chart—no complicated calculations needed.

But here’s a key point—overbought and oversold only indicate short-term overreaction, not that RSI hitting 70 will definitely lead to a decline or hitting 30 will definitely lead to a rise. I’ve seen too many beginners lose money because they ignore this.

Regarding how RSI works, it’s actually based on a formula that calculates RSI: RSI = 100 – (100 / (1 + RS)). Breaking it down, first you calculate the daily price change over a certain period (default 14 candles), then find the average gain and average loss, divide the average gain by the average loss to get the RS value, and finally plug it into the formula to get a value between 0 and 100. I initially thought it was complicated, but after a few uses, I got used to it.

Parameter settings are another key factor. The default RSI 14 is suitable for 4-hour and daily trading, offering a balanced choice. But if you prefer short-term trading, try RSI 6, which reacts much faster and generates more signals, though false signals will also increase. Conversely, RSI 24 is suitable for weekly and longer-term trend analysis, with fewer but more reliable signals. Honestly, there’s no absolute best parameter; it depends on your trading style and preferences.

Besides overbought and oversold, I often use RSI divergence to judge whether momentum is still strong enough to support the price. Divergence occurs when the price makes a new high but RSI doesn’t follow suit, usually indicating that the upward momentum is weakening and the rebound risk is increasing. Conversely, if the price hits a new low but RSI doesn’t break the previous low, it’s called bullish divergence, often signaling that the downward momentum is waning and a rebound may be near.

When using TradingView, I enable the “Divergence” indicator, which automatically marks divergence signals, saving a lot of effort. But remember, divergence doesn’t necessarily mean a trend reversal; it’s just a warning that momentum might be insufficient.

Another way to use RSI is to watch the midline 50. If RSI crosses above 50, it indicates a bullish trend; crossing below suggests a bearish trend. To avoid noise, I usually observe this midline crossover with RSI 24.

Finally, I want to mention RSI’s limitations. In strong trending markets, false signals are common—for example, during a strong rally, RSI might already be above 80, but a beginner seeing overbought conditions might short, only to see the price continue rising. Another common mistake is ignoring the time frame differences; signals on the hourly chart might be misleading if you don’t consider the overall daily trend, leading to getting trapped.

So my advice is, although RSI is intuitive and easy to use, don’t rely on it too heavily alone. Combine it with MACD, moving averages, or candlestick patterns for better results. The logic behind the RSI formula is essentially a mathematical way to quantify the strength of buying and selling momentum in the market. Once you understand this, you can apply it more flexibly. Beginners can start with RSI 14 and gradually adjust parameters based on their trading habits to find the rhythm that suits them best.