Chart Advisor: Mastering the Relative Strength Index (RSI): How to Read it Correctly

By Jay A. Petit, CMT

Mastering the Relative Strength Index (RSI): How to Read it Correctly

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Mastering the Relative Strength Index (RSI): How to Read it Correctly

Author’s Note: Over two decades of watching charts on a daily basis, I’ve misused the RSI early on and missed its deeper signals. This article shares the lessons I wish I had fully grasped sooner — insights that have proven to be reliable across markets, trends, and time.

The Relative Strength Index (RSI) is one of the most popular momentum oscillators in technical analysis. While many traders treat it as a simple overbought/oversold signal, deeper research and long-term observation show that RSI’s behavior shifts depending on the underlying market trend.

This article explains how RSI “range rules” work, why overbought readings can actually signal strength, and how traders and investors can apply these insights effectively across asset classes.

Understanding RSI: Beyond the 0 to 100 Scale

The RSI is typically plotted on a scale from 0 to 100, with overbought levels defined above 70 and oversold levels below 30. Many beginners — myself included in the early years of my career — interpret these thresholds as automatic trade signals: buy when oversold, sell when overbought.

However, this approach often fails in trending markets. With time and experience, I realized that simply reacting to these levels leads to false signals and premature exits from strong trends.

RSI Range Rules: A More Nuanced Approach

Constance Brown, in her influential book Technical Analysis for the Trading Professional, introduced the concept of RSI range rules, which state:

In an uptrend, RSI operates in a bullish range with lows near 40–50 and highs between 80–90.

In a downtrend, RSI stays in a bearish range with lows around 20–30 and highs limited to 55–65.

Rather than focusing solely on extreme levels, traders should observe how high or how low the RSI goes relative to these trend-defined ranges. In my own experience, recognizing these ranges was a breakthrough that helped me shift from chasing reversals to riding trends more confidently.

Example 1: Meta Platforms (META)

On the weekly chart of Meta Platforms (META), the RSI behavior shifted depending on the trend:

Downtrend phase: RSI fluctuated between ~20–30 on pullbacks and ~55–65 on rallies.

Uptrend phase: RSI lows stabilized above ~40–50, while highs extended into the 80–90 zone.

A key insight is that trend reversals often begin when the RSI no longer reaches prior extremes — a subtle but powerful signal of changing market dynamics. I’ve come to rely on this as one of my earliest clues that a market phase may be transitioning.

Meta weekly chart: Typical RSI ranges in downtrends (20–65) vs. uptrends (40–90).

Example 2: Tencent Holdings (700 HK)

Tencent’s monthly chart highlights RSI’s long-term value. While a traditional moving average crossover system would have triggered multiple whipsaws, RSI stayed in a bullish range for nearly 18 years, keeping traders and investors aligned with the prevailing uptrend.

Tencent (700 HK) monthly chart: showing RSI maintaining a bullish range for ~18 years.

Importantly, overbought RSI levels during strong trends signal momentum, not necessarily exhaustion. Early in my work, I underestimated overbought conditions, expecting reversals that often never came. Recognizing them instead as signs of strength was a major mindset shift.

Practical Takeaways

• RSI is most effective when understood in context, not as a standalone signal.
  
• Observe whether RSI operates in bullish or bearish ranges relative to the trend.
  
• Watch range shifts to identify emerging reversals.
  
• Recognize that overbought readings during an uptrend often reflect strength.

Final Thoughts

The RSI remains a cornerstone of technical analysis, but its true power emerges when applied with nuance. By understanding RSI range rules, recognizing divergence, and contextualizing overbought/oversold signals, traders and investors can sharpen their edge across market environments.

Personally, I continue to rely on these principles every day as part of my technical process — proof that some lessons, once learned, remain valuable for a lifetime.

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Originally posted 9th May 2025