RSI and Oscillator Trading

Oscillators help identify overbought/oversold conditions and potential reversals.

Understanding RSI



What is RSI?

• Relative Strength Index
• Momentum oscillator (0-100)
• Default setting: 14 periods
• Created by J. Welles Wilder

RSI Levels

• Above 70: Overbought
• Below 30: Oversold
• 50 level: Momentum centerline

RSI Trading Methods

Overbought/Oversold

• RSI above 70 = look for shorts
• RSI below 30 = look for longs
• Wait for confirmation, do not trade blindly
• Works best in ranging markets

RSI Divergence

• Price makes higher high, RSI makes lower high = bearish
• Price makes lower low, RSI makes higher low = bullish
• Powerful reversal signal
• Combine with key levels

RSI Centerline Cross

• Cross above 50 = bullish momentum
• Cross below 50 = bearish momentum
• Good for trend confirmation
• Less common strategy

Other Popular Oscillators

Stochastic Oscillator

• Measures close relative to range
• %K and %D lines
• Above 80: Overbought
• Below 20: Oversold
• Crossovers as signals

MACD



• Moving Average Convergence Divergence
• MACD line and Signal line
• Histogram shows momentum
• Crossovers and divergences

CCI (Commodity Channel Index)

• Measures price vs average
• Above 100: Strong up
• Below -100: Strong down
• Good for breakout confirmation

Best Practices

When Oscillators Work Best

• Ranging markets
• Finding reversals at key levels
• Confirming trend exhaustion
• Identifying divergences

When Oscillators Fail

• Strong trending markets
• RSI can stay overbought for weeks
• Never trade overbought/oversold alone
• Trending markets override oscillators