How to use the RSI formula and why do professionals understand it differently

If you’ve been trading for 1-2 years, you’ve probably heard the strategy “Buy at 30, Sell at 70.” But the reality is that many often blow their capital. Why is that? Because the understanding is incomplete. Advanced traders use RSI to read market momentum, not to guess buy/sell cycles. Let’s truly understand it.

What is RSI and why it’s not what you think

Relative Strength Index (RSI) was created in 1978 by J. Welles Wilder Jr. It is a classic technical analysis tool. But most basic understanding gets this part wrong.

Point One: RSI measures momentum, not reversal points

What RSI actually does is measure the speed and magnitude of price changes. It tells you how strong or weak the market is, on a scale of 0-100.

Point Two: The name “Relative Strength” causes confusion

The term “Relative Strength” does not mean comparing asset A to B. It refers to an internal comparison: measuring “average buying power” versus “average selling power” over a set period.

Therefore, the correct meaning of RSI is “a tool to measure market strength,” not “an indicator of reversal points.”

How the RSI formula works

For most traders, no need to calculate manually; platforms do it for you. But understanding the principle makes you better at using it.

The core of the formula is the variable RS:

RS = Average Gain (Average Buying Power) / Average Loss (Average Selling Power)

Then RSI = 100 - (100 / (1 + RS)()

What to understand from this formula:

• If average buying power > average selling power, then RS > 1 and RSI > 50
• If average buying power < average selling power, then RS < 1 and RSI < 50
• Most importantly: if buying and selling are balanced, RSI = 50 exactly

This is why the 50 line is the true equilibrium point, not 70 or 30.

Where do the 70/30 techniques fail?

When you first look at an RSI chart, you see the 70 and 30 lines, which are standard settings.

Common advice says:

• Overbought )too much buying(: RSI > 70 → Sell
• Oversold )too much selling(: RSI < 30 → Buy

It sounds simple, but this is a dangerous trap.

Major problem: strong trend

In a strongly trending market, RSI can stay above 70 for weeks because it reflects strong buying momentum.

If you rush to sell every time it hits 70, you’ll be trading against the trend and risking heavy losses.

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

When does the 70/30 technique work?

Only when the market is sideways )range-bound(, with no clear trend. Then buying at 30 )near support( and selling at 70 )near resistance( can be effective.

Professional techniques

This is the most important part to elevate your trading from beginner to professional.

) 1. Divergence - Early warning signals

Divergence occurs when price and RSI move in opposite directions, indicating momentum loss.

Bullish Divergence ###uptrend signal(

• Occurs during a downtrend
• Price makes a new low, but RSI does not )higher lows(
• Indicates weakening selling pressure, hinting at a reversal upward

Bearish Divergence )downtrend signal(

• Occurs during an uptrend
• Price makes a new high, but RSI does not )lower highs(
• Indicates weakening buying pressure, hinting at a decline

) 2. Failure Swings - Confirmation of reversal

The RSI creator states that Failure Swing is the strongest signal. It confirms that momentum has truly shifted.

Failure Swing Top ###confirmation of reversal(

• RSI rises above 70 then falls back
• Price makes a new high, but RSI does not
• RSI breaks below previous low = clear sell signal

Failure Swing Bottom )confirmation of reversal(

• RSI drops below 30 then rises back
• Price makes a new low, but RSI does not
• RSI breaks above previous high = clear buy signal

) 3. Centerline Crossover - The 50 line as a compass

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

• RSI > 50: Bullish mode, continue holding as long as above 50
• RSI < 50: Bearish mode, continue holding as long as below 50

4. Adjust RSI zones according to trend

This is a game-changing technique.

In a strong uptrend:

• RSI rarely drops below 30
• It moves within 40-90
• The 40-50 zone becomes a new support
• Professionals buy when RSI dips into 40-50 ###not waiting for 30(

In a strong downtrend:

• RSI rarely rises above 70
• It moves within 10-60
• The 50-60 zone becomes a new resistance
• Professionals sell when RSI bounces into 50-60 )not waiting for 70(

Weaknesses and how to fix them

RSI can give false signals, especially in choppy markets, and it is always a lagging indicator.

Solution: Don’t rely on RSI alone

Use confluence—combine signals from multiple tools:

• RSI + Price Action: Buy when RSI hits 30 AND price is at support
• RSI + MACD: Wait for RSI divergence AND MACD crossover )Bullish Crossover( at the same time

Practical example

Suppose you’re trading precious metals in a strong uptrend approaching a key resistance.

1. Price makes a new high, but RSI does not
2. Clear Bearish Divergence appears
3. Wait until RSI breaks below previous low )Failure Swing Top confirmation(
4. Additionally, a clear bearish candle pattern forms at resistance )Price Action confirmation(
5. Enter a sell with high confidence, place stop above the latest high

Waiting for confirmation signals from multiple angles makes entries more precise and risk-reward more favorable.

Summary

RSI is an excellent momentum indicator, but signals must be interpreted correctly. Whether trading Forex, gold, oil, or other markets, practice and multi-layered strategies )Confluence( are key to success.

Don’t rush into trades based on a single signal. Backtest on historical charts to see when strategies align best. That’s how top traders make money, while beginners often blow their capital.