The true RSI value - Why most traders use it incorrectly

RSI is not a tool for pinpointing reversal points, but a lens to measure the strength of market momentum. That’s why many people use it and end up losing.

Because the fundamental understanding among users often revolves around “buy when Oversold and sell when Overbought,” which is the most dangerous trap.

What is RSI really?

RSI (Relative Strength Index) is a technical analysis tool developed and published by J. Welles Wilder Jr. in 1978.

The biggest misconceptions are twofold:

First: It’s a Momentum Oscillator, not a reversal indicator

The core of RSI is measuring the speed and magnitude of price changes to assess how strong buying or selling pressure is right now. It displays as a number on a 0-100 scale based on the candles.

Second: The term “Relative Strength” causes confusion

It does not mean comparing the strength of asset A versus B, but refers to comparing buying versus selling pressure within the same asset over a specified period.

Formula and nature of RSI

For regular traders, you don’t need to calculate it yourself; the platform does it for you. But understanding the formula helps you use it more skillfully.

At its core is the variable RS (Relative Strength)

RS = Average Gain / Average Loss

where:

• Average Gain (AvgU): the mean of positive closes over 14 bars (standard value)
• Average Loss (AvgD): the mean of negative closes over the same period

Key points to avoid misconceptions:

• If Average Gain > Average Loss → RS > 1 → RSI > 50 (bullish side)
• If Average Gain < Average Loss → RS < 1 → RSI < 50 (bearish side)
• If Average Gain = Average Loss → RS = 1 → RSI = 50, exactly (balance point)

The 50 line is the true compass, not 70 or 30.

The most common failed 70/30 strategy

Textbooks and many teach:

• RSI > 70 = Overbought = Sell
• RSI < 30 = Oversold = Buy

Why does it often fail?

Answer: Trends

In a strong trending market, RSI can “stick” in Overbought (>70) or Oversold (<30) zones for weeks.

For example, in a bullish gold trend, RSI may stay above 70 for a long time because it reflects strong buying momentum.

If novice traders rush to sell every time RSI hits 70, their portfolios will blow up before the price corrects.

This is the most dangerous “counter-trend” move.

When is the 70/30 strategy effective?

Only in Sideways or Trading Ranges markets.

In such situations:

• Buy near RSI ~30 (close to support)
• Sell near RSI ~70 (close to resistance)

This can be a highly effective trading approach.

Professional techniques

1. Divergence - a powerful warning signal

Divergence occurs when price and RSI move in opposite directions, indicating trend exhaustion.

Bullish Divergence (Bullish Reversal)

• Price: makes new lows (Lower Low)
• RSI: fails to follow, makes higher lows (Higher Low)
• Meaning: Selling pressure wanes, market may reverse upward
• Most reliable when RSI is in Oversold zone (<30)

Bearish Divergence (Bearish Reversal)

• Price: makes new highs (Higher High)
• RSI: fails to follow, makes lower highs (Lower High)
• Meaning: Buying momentum weakens, market may reverse downward
• Most reliable when RSI is in Overbought zone (>70)

2. Failure Swing - confirming trend reversal

The RSI creator himself states that Failure Swing is the strongest signal

If Divergence is a “warning,” then Failure Swing is a “confirmation.”

Failure Swing Top (Bearish Reversal Confirmed)

1. RSI rises above 70 (High point 1)
2. Price makes a new high, but RSI makes a lower high (Bearish Divergence)
3. RSI breaks below its previous Low → clear sell signal

Failure Swing Bottom (Bullish Reversal Confirmed)

1. RSI drops below 30 (Low point 1)
2. Price makes a new low, but RSI makes a higher low (Bullish Divergence)
3. RSI breaks above its previous High → clear buy signal

This technique waits for RSI to “confirm” its trend change, not just guess.

3. Centerline Crossover (the 50 line)

For Thai trend-following traders, the 50 line may be more important than 70/30.

Because the 50 line = true equilibrium point.

• RSI > 50: Bullish market, buying pressure dominates

  • As long as RSI stays above 50, look for buy or hold Long

• RSI < 50: Bearish market, selling pressure dominates

  • As long as RSI stays below 50, look for sell or hold Short

4. Adjust RSI zones according to trend

This is the most advanced technique and explains why the 70/30 strategy fails.

In a strong uptrend:

• RSI doesn’t drop to 30 but moves within 40-90
• The 40-50 zone becomes the new support/Oversold area
• Pro traders buy when RSI dips into 40-50 and bounces, not waiting for 30
• They avoid selling at 70, which goes against the trend

In a strong downtrend:

• RSI doesn’t rise to 70 but moves within 10-60
• The 50-60 zone becomes the new resistance/Overbought area
• Pro traders sell when RSI bounces into 50-60 and fails to continue, not waiting for 70
• They avoid buying at 30, which is catching a falling knife

How to correct mistakes

No indicator is 100% accurate. The key is never rely solely on RSI.

Correction Method 1: RSI + Price Action

• Don’t buy just because RSI hits 30
• Buy when RSI hits 30 and price hits a key support level
• Sell when RSI shows Bearish Divergence and price hits a key resistance

Correction Method 2: RSI + MACD

• MACD: for trend confirmation
• RSI: for precise entry timing
• Wait for both signals: RSI shows Bullish Divergence and MACD crosses up simultaneously

Lessons from real trading

Suppose trading gold XAUUSD on a 4-hour chart:

Step 1: Big picture — price continues upward approaching strong resistance at $4,250

Step 2: Warning signs — price breaks above $4,200 making a new high, but RSI shows clear Bearish Divergence, refusing to make a new high

Step 3: Wait for confirmation — don’t rush to sell:

• Failure Swing: RSI breaks below previous Low
• Centerline: RSI crosses below 50
• Price action: at $4,250, a bearish reversal candle appears

Step 4: Enter sell — when all three signals align

Step 5: Manage risk — set Stop Loss above the recent High, Take Profit at previous support

This multi-layer confirmation with clear Stop Loss creates a favorable Risk:Reward ratio and is the essence of sustainable trading.

Summary

RSI value is not a simple buy-sell indicator but a momentum reading lens.

Mistakes come not from the indicator itself but from misunderstanding.

The true keys to success:

1. Understand that RSI measures momentum, not reversal points
2. Don’t blindly apply the 70/30 strategy as in textbooks; it works only in sideways markets
3. Learn divergence, failure swing, and adjusting RSI zones according to trend
4. Never rely on RSI alone; combine with Price Action or other indicators
5. Practice on real charts until it becomes instinctive

Whether you trade Forex, gold, oil, indices, or crypto, this RSI knowledge will help you trade sustainably.