The Relative Strength Index (RSI) is the most commonly known indicator out there. It’s probably the first thing a trader learns after he discovers technical analysis. On books and websites, on YouTube channels and even from casual talks with novice traders, the RSI is omnipresent. But the issue here is that 99% of the traders use it entirely wrongly.
Most traders rely on RSI’s default settings and stick to the overbought and oversold method. They assume that a reading above 70 means “sell” and below 30 means “buy.” While this may work occasionally, it often leads to inconsistent results, frustrating losses, and a misguided understanding of how RSI is truly intended to function.
To fix this common abuse, let’s go back to using RSI correctly. The RSI is not merely an overbought/oversold indicator—it’s a momentum oscillator. It quantifies the velocity and change of price action and oscillates between 0 and 100. More significantly, it’s a measure of strength, not merely a reversal signal.
Here, we will address the usual pitfalls, adjust the default settings, add multi-timeframe confirmations, and give you two incredibly effective ways to use RSI properly—complete with a pro tip on how to blend it with price action for maximum returns.
Combine RSI with Price Action?
Know RSI’s True Purpose
The Relative Strength Index (RSI) was created to gauge momentum, not merely to spot reversal points. By only using it to spot overbought and oversold areas, traders fail to realize the underlying philosophy: the gauging of the strength of a trend.
Rather than looking for price to reverse on each successive hit of 70 or 30, we should look at how RSI acts on trending markets.
Adjusting the RSI Settings
The standard RSI values of 70 (overbought) and 30 (oversold) are too sensitive and produce too many false signals. A better approach is to set these values to:
- Overbought: 80
- Oversold: 20
Doing this removes noise and provides you with fewer but better-quality signals.
Multi-Timeframe Confirmation
One of the most intelligent methods of making your RSI signals more accurate is to confirm these signals on multiple timeframes. For instance:
- Get a signal on the 1-minute chart
- Check whether the RSI provides a comparable signal on the 5-minute or even the 15-minute chart
Trade only when multiple timeframes confirm. That way, your trade is supported by more extensive market momentum rather than noise on a lower time frame.
Insert Price Action Confirmation
Even when using optimized RSI settings and multi-timeframe confluence, never trade RSI alone. Confirm with price action signals. For example:
- Seek double bar break patterns
- Wait for price to move below the hesitation candles’ lows
- Utilize RSI rebounding to the midline (50) as additional confirmation
By using a combination of price action and RSI, you filter out low-probability setups and have a higher probability of success for your trade.
How to Utilize RSI Correctly to Identify Pullbacks
For Bullish Setups:
Look for a strong uptrend
- Verify RSI is residing in the upper quadrant (50-80)
- Wait for RSI to retreat to the midline (approximately 50)
- Enter long anticipating a trend continuation
For Bearish Setups:
- Identify a strong downtrend
- Verify RSI is residing in the lower quadrant (20-50)
- Wait for RSI to increase to the midline
- Enter short anticipating a pullback and then a trend continuation
This strategy is more about continuation of momentum than betting against it, which is closer to what RSI was originally intended for.
Use RSI with VWAP for Exit Strategy
Here’s a good way to handle your trade:
- Take partial profit when RSI comes back to the midline
- Take ultimate profit when price hits VWAP (Volume Weighted Average Price)
- This strategy allows you to lock in profits on pullbacks and ride trends to reasonable conclusion points.
Summary: How to Utilize RSI Properly
The majority of traders use the RSI improperly because they only search for reversals with old settings. By modifying the indicator’s levels, verifying on several timeframes, incorporating it with price action, and utilizing it for detecting pullbacks within trends, you dramatically maximize your win ratio.
How to use RSI correctly entails a move from reactive trading (attempting to catch tops and bottoms) to proactive trading (riding powerful trends with intelligent entries and exits).
Conclusion
The RSI wasn’t designed to yell “buy” when a stock reached 30, or “sell” when it reached 70. It was designed to indicate relative strength—and that strength must be interpreted in light of the trend and price action.
By using these techniques, you’ll begin to appreciate why the RSI is held in such esteem when applied appropriately. It has nothing to do with manipulating indicator settings—everything to do with altering the way you think regarding market momentum.