RSI used by professionals: The truth beyond the textbooks

Most forex traders learn RSI from books: buy at 30, sell at 70, and so on. But when they start trading in real markets, they often find this formula fails frequently. Why is that? The answer lies in truly understanding that RSI is not a tool for predicting reversals, but rather a market momentum measurement tool. Recognizing this difference can significantly improve your trading performance.

Basic Clarification: What is RSI?

Relative Strength Index (RSI) is a technical analysis indicator developed by J. Welles Wilder Jr. and introduced in 1978. Since then, it remains widely used by traders.

The main confusion comes from its name. “Relative Strength” does not mean comparing whether gold is stronger than oil, but rather it points to a comparison within the asset itself—whether the average buying strength is greater than the average selling strength during a specified period.

Furthermore, RSI does not predict the direction of price movement. Instead, it indicates which side the current momentum favors. When prices rise but momentum weakens, that’s a warning sign, not necessarily a sell signal.

The True Formula: Understanding RS and Average Gain/Loss

The most important variable in RSI is RS (Relative Strength), calculated as:

RS = Average Gain / Average Loss

• Average Gain: the average of upward closing candles (typically over 14 periods)
• Average Loss: the average of downward closing candles (using positive values)

From this, we get:

• If buying pressure > selling pressure → RS > 1 → RSI rises above 50(
• If buying pressure < selling pressure → RS < 1 → RSI falls below 50)
• If buying pressure = selling pressure → RS = 1 → RSI = 50(equilibrium point)

The 50 line is more important than 70/30 because it represents the true balance point, indicating whether the market is shifting from bullish to bearish or vice versa.

Why the 70/30 Strategy Fails

The main problem is that novice traders follow textbook advice: buy at 30, sell at 70, as if it’s a law. In reality, this rule works well only in sideways markets (range-bound).

Issues arise during strong trending markets. In a strong uptrend, RSI can stay above 70 for weeks because it reflects that buying momentum remains strong. Traders rushing to sell here, thinking “overbought,” are actually fighting the trend.

Similarly, in a strong downtrend, RSI can stay below 30 for a long time. Buying in this situation is akin to “catching a falling knife,” as prices can still fall further.

Techniques Used by Professionals

( 1. Divergence: Early warning of trend exhaustion

Bullish Divergence occurs when prices make new lows, but RSI fails to follow and makes higher lows. This indicates weakening selling pressure and a potential reversal upward.

Bearish Divergence occurs when prices make new highs, but RSI does not follow and makes lower highs. This suggests weakening buying pressure and a possible downturn.

This signal is most reliable when it occurs in the Overbought zone )>70### for Bearish, or Oversold zone (<30) for Bullish.

( 2. Failure Swings: Confirming reversals

This is the strongest technique according to RSI creators.

Failure Swing Top: RSI breaks above 70 but price continues higher, creating Bearish Divergence, then RSI drops below its previous low, confirming a reversal and signaling to sell.

Failure Swing Bottom: RSI drops below 30 but price continues lower, creating Bullish Divergence, then RSI rises above its previous high, confirming a reversal and signaling to buy.

) 3. Centerline Crossover: Reading the main trend

As long as RSI stays above 50, the market is bullish; below 50, bearish. It’s a simple yet effective way to gauge the main trend direction.

4. Adjust zones according to trend strength

In a strong uptrend, RSI tends to stay within 40-90, not 30-70. In this case, the 40-50 zone becomes a new support.

In a strong downtrend, RSI tends to stay within 10-60, not 30-70. Here, 50-60 becomes a new resistance.

Limitations of RSI

RSI is a Lagging Indicator, meaning it is calculated from past data and cannot predict future movements.

Additionally, divergence can warn well in advance, but prices may continue trending for days before a real reversal occurs.

The solution is to not rely solely on RSI. Use it together with Price Action ###support-resistance levels### or MACD to strengthen signals.

Case Study: Forex Gold Trading

Suppose we analyze the XAUUSD 4-hour chart. Prices are trending upward and approaching psychological resistance. The price hits a new high, but RSI does not follow upward → Bearish Divergence.

This is just a warning signal. We wait for confirmation:

• RSI drops below 50 (confirming bearish)
• Price breaks out from resistance, or
• RSI forms a Failure Swing

When multiple signals align, it’s time to enter a sell order with a Stop Loss above the latest high.

Summary

In the context of forex, RSI should be understood as a momentum measurement, not a predictor. Most misunderstandings come from using the 70/30 rule without considering market conditions.

The solution is to adjust RSI zones according to trend, use Divergence as an early warning, and wait for confirmation from other tools before trading. This longer wait can improve win rates and lead to sustainable profits.