How do professional traders actually use RSI? How do expert traders read the market?

The RSI (Relative Strength Index) is a widely used tool among traders, but misconceptions can lead many to lose money. Many believe that RSI is used to find reversal points (Reversal Point), but that is not true. The real RSI is a momentum indicator. This is why professional traders can consistently profit while beginners tend to lose more the more they use it.

What is the Real Meaning of Relative Strength Index?

RSI is a technical analysis tool developed by J. Welles Wilder Jr. in 1978. Its main idea is to measure the speed and magnitude of price changes to assess whether the market is in a strong or weak state.

A common misinterpretation: the term “Relative Strength” does not mean comparing one asset to another, but rather measuring the relationship between the average gains (Average Gain) and average losses (Average Loss) of that asset.

Therefore, the correct understanding of RSI is a momentum indicator, not a reversal signal. When RSI rises high, it indicates strong buying pressure, not that the price must fall.

How is RSI Calculated and What Do the Values Mean?

Traders usually do not need to calculate it manually, as trading platforms display it automatically. However, understanding the underlying logic helps in using it more accurately.

Key point: RS = Average Gain / Average Loss

Average Gain (AvgU): The average of days with positive closing prices, typically over 14 days or candles.

Average Loss (AvgD): The average of days with negative closing prices (using positive values).

Important logic to understand:

• If buying pressure exceeds selling pressure (AvgU > AvgD) → RS > 1 → RSI rises above 50
• If selling pressure exceeds buying pressure (AvgU < AvgD) → RS < 1 → RSI falls below 50
• If both are equal (AvgU = AvgD) → RS = 1 → RSI = 50

This is crucial: the 50 line is not just a number; it’s the true equilibrium point of momentum. It is not the 70 or 30 lines that most people think.

Why Do the 70/30 Strategies Fail?

When traders first look at an RSI chart, they see two lines at 70 and 30. Traditional teachings say:

If RSI > 70 → Overbought (Too much buying) → Sell

If RSI < 30 → Oversold (Too much selling) → Buy

It sounds logical, but it is a dangerous trap.

Why does it fail? The answer is “Trend”.

In a strong trending market, RSI can stay in overbought (>70) or oversold (<30) zones for a long time. Imagine: in a strong uptrend, RSI might stay above 70 for weeks because the momentum remains strong.

If beginners rush to sell every time RSI hits 70, thinking it’s overbought, their portfolios will blow up before the price drops. This is the most dangerous “counter-trend” move.

Similarly, in a strong downtrend, RSI can stay below 30 for a long time. Buying in that situation is like “catching a falling knife.”

Therefore, the 70/30 technique only works in sideways markets (range-bound), because then buying near 30 at support and selling near 70 at resistance is effective.

Professional Techniques for Using RSI

Here’s what separates professionals from regular traders:

1. Divergence - Early Warning Signal

Divergence occurs when price and RSI move in opposite directions. It signals that the current trend may be losing strength.

Bullish Divergence (Bullish Signal)

• Market is still downtrend, but price makes new lows
• RSI does not follow down but makes higher lows
• Meaning: Selling momentum (selling pressure) is weakening; a trend reversal upward may occur

Bearish Divergence (Bearish Signal)

• Market is still uptrend, but price makes new highs
• RSI does not follow up but makes lower highs
• Meaning: Buying momentum (buying pressure) is weakening; a trend reversal downward may occur

2. Failure Swings - The Strongest Confirmation

Wilder states that Failure Swings are the most powerful signals, confirming a true reversal.

Failure Swing Top (Bearish Confirmation)

• RSI rises above 70 to a high of 1
• Price makes a new high, but RSI fails to reach 70
• RSI then turns down and breaks below the previous low ← This is the Fail Point, a strong sell signal

Failure Swing Bottom (Bullish Confirmation)

• RSI drops below 30 to a low of 1
• Price makes a new low, but RSI fails to reach 30
• RSI then turns up and breaks above the previous high ← This is the Fail Point, a strong buy signal

3. Centerline Crossover - Using the 50 line

For trend-following traders (Trend Followers), the 50 line can be more important than 70/30.

RSI > 50: Bullish market; consider buying or holding long as long as RSI stays above 50.

RSI < 50: Bearish market; consider selling or holding short as long as RSI stays below 50.

4. Adjust RSI Zones According to Trend

This technique changes everything:

In a strong uptrend:

• RSI rarely drops to 30
• It moves within 40-90
• The 40-50 zone becomes the new support and oversold area
• Buying in the 40-50 zone is better than at 30

In a strong downtrend:

• RSI rarely rises to 70
• It moves within 10-60
• The 50-60 zone becomes the new resistance and overbought area
• Selling in the 50-60 zone is better than at 70

Trading Example: Gold XAUUSD on H4 Chart

Scenario: Gold price continues upward, approaching the psychological resistance at 4,250 USD.

Step 1: Big picture analysis

• Market is in a strong uptrend
• Price nears resistance at 4,250 USD

Step 2: Look for warning signs

• Price makes Higher Highs (new highs)
• But RSI makes Lower Highs (lower highs) ← Clear Bearish Divergence
• First sign: buying momentum is waning

Step 3: Wait for confirmation Don’t rush to sell:

• Check if RSI breaks previous lows or not
• Look for Failure Swing: RSI breaks below previous lows or not
• Check if RSI crosses below 50
• Observe price action: bearish engulfing candles at resistance

Step 4: Enter trade When multiple signals confirm → Place a sell order

Step 5: Manage risk

• Stop Loss: above recent high (above 4,250)
• Take Profit: near support levels (around 3,879)

This multi-confirmation approach reduces risk and improves the Risk:Reward ratio significantly.

Limitations of RSI and How to Improve

Problems:

• False signals occur frequently (False Signals)
• Less reliable in highly volatile markets
• It is a lagging indicator (Lagging Indicator)
• Divergence does not guarantee immediate reversal

Solution: Don’t rely on RSI alone

Professional traders use Confluence — waiting for multiple tools to align.

Method 1: RSI + Price Action

• Buy when RSI hits 30 and price reaches key support simultaneously
• Sell when Bearish Divergence appears and price hits resistance

Method 2: RSI + MACD

• MACD confirms trend direction
• RSI pinpoints entry points
• Wait for RSI to show Bullish Divergence and MACD to cross up; this is a very strong signal

Summary

The RSI indicator is an effective momentum tool, but not a crystal ball.

The key is understanding its true meaning:

• Not a reversal indicator, but a momentum reader
• The 50 line is the true equilibrium, not 70/30
• Use it in conjunction with other tools for confirmation
• Never fight the trend

When used correctly with Price Action and MACD, RSI can give you an edge in reading the market like a professional trader.

Most importantly: Practice on a demo account before trading real money to deeply understand how RSI works in real market conditions and build experience before risking your funds.