RSI Relative Strength Index Practical Guide: Mastering the Formula, Divergence, and Damping Strategies

In cryptocurrency or stock trading, technical analysis is a must-have skill for many investors. Among them, the RSI indicator has become a popular entry point for beginners due to its ease of learning and use. However, knowing how to read charts and truly utilize indicators are worlds apart. Today, we will delve into the core logic of RSI, including its RSI formula, divergence signals, and how to break through the frustrating dulling phenomenon.

What is RSI? Understanding from the essence

Relative Strength Index (RSI)'s core idea is straightforward: by quantifying the strength comparison between buying and selling forces in the market, it helps determine when a trend is about to reverse.

Simply put, RSI answers a question: during this recent period, which is stronger—upward momentum or downward momentum? If the upward momentum is stronger, the market is optimistic; if the downward momentum is stronger, the market is pessimistic.

RSI is highly favored in trading circles mainly for two reasons:

First, simple calculation logic — unlike MACD, which involves complex exponential smoothing calculations, RSI only requires basic addition, subtraction, multiplication, and division, making it quick for beginners to grasp.

Second, clear and intuitive signals — the fixed range of 0 to 100, with well-defined overbought and oversold levels, makes judgment easier.

But this also sets a trap: simplicity sometimes means it can be easily “deceived” by the market, leading to divergence and dulling issues, which we will discuss later.

Deep dive into the RSI formula: three steps to understand the calculation logic

Rather than memorizing the formula blindly, it’s better to understand what each step does.

Step 1: Calculate average gains and average losses

Choose a period (commonly 14 days). Within these 14 days:

• Sum all upward price changes, then divide by 14 to get the average upward change
• Sum all downward price changes, then divide by 14 to get the average downward change

Step 2: Calculate the Relative Strength (RS)

RS = Average upward change ÷ Average downward change

Step 3: Convert to RSI value

RSI = 100 - (100 ÷ (1 + RS))

or equivalently: RSI = 100 × RS ÷ (1 + RS)

The result is a number between 0 and 100.

Why calculate it this way? Because when upward momentum is much greater than downward, RS is large, and RSI approaches 100; conversely, when downward momentum dominates, RS is small, and RSI approaches 0. This effectively quantifies the market’s bullish and bearish forces.

The three key zones of RSI: how to interpret the values

Once you know how to calculate RSI, the next step is how to use it. RSI values are divided into three zones, representing different market states:

Overbought zone (RSI > 70)

• Signal: Market is overly optimistic, buying power is overextended
• Implication: Price may pull back
• Suitable action: Consider reducing positions or closing trades

Normal zone (30 ≤ RSI ≤ 70)

• Signal: Market is relatively balanced, bulls and bears are roughly equal
• Implication: Trend has not reached extreme levels
• Suitable action: Observe or test with small positions

Oversold zone (RSI < 30)

• Signal: Market is overly pessimistic, selling power is overextended
• Implication: Price may rebound
• Suitable action: Consider gradually building positions

However, there is a trap here: extreme zones (RSI > 80 or RSI < 20) are less frequent, but once they appear, they often indicate very extreme market sentiment, sometimes even signaling a trend reversal.

RSI divergence: the golden signal for predicting reversals

RSI divergence is one of the most valuable discoveries in technical analysis. It refers to a “conflict” between price movement and RSI trend—when a new high or low is made, but the RSI does not follow suit.

( Top divergence (bearish signal)

Price makes a new high, but RSI declines or makes a lower high.

Real-world example: Take Bitcoin as an example. When BTC price rose from $70,000 to $100,000, creating a new high, RSI dropped from 82 to 58, not confirming the new high.

What does this indicate? Although BTC price is still rising, the buying momentum is waning. The upward move is like a “bluff,” often signaling an upcoming correction.

Investor response: Reduce or exit positions promptly to avoid being caught in a downturn.

( Bottom divergence (bullish signal)

Price makes a new low, but RSI does not follow—either rising or staying flat.

This suggests that although the price is falling, selling pressure is weakening. The market may be accumulating energy for a rebound.

Investor response: Consider partial entries to catch the rebound.

) Core logic of divergence judgment

Divergence is effective because it fundamentally reflects market sentiment imbalance. When both bulls and bears are pushed to extremes, one side’s force will eventually explode, leading to a trend reversal.

But beware: not all divergences are valid. If during divergence formation, RSI repeatedly fluctuates and crosses the 50 midline multiple times, it indicates market consolidation without enough pressure for reversal. In such cases, divergence signals are less reliable.

RSI dulling: the failure trap in strong trends

RSI has a notorious flaw called dulling.

What is dulling? When RSI stays for a long time in overbought (>70) or oversold (<30) zones, its sensitivity to price changes diminishes, causing overbought and oversold signals to lose effectiveness.

When does it occur? During strong upward or downward trends. Market sentiment becomes extremely biased, and RSI acts like a “fully charged battery” that can’t go higher or lower, losing predictive value.

Real-world scenario: In a strong uptrend, RSI may remain in the 75-90 range for an extended period. According to conventional logic, this should be a sell signal, but prices keep rising. Many beginners get trapped here.

) Four key strategies to handle dulling

1. Combine with trend analysis In strong trends, don’t overreact to RSI overbought signals. Wait for trendline breaks or other indicators to confirm reversals before acting.

2. Use auxiliary indicators Simultaneously observe moving averages, MACD, volume, etc. If they also signal a reversal, the confidence increases.

3. Adjust RSI parameters Try changing the calculation period. Shorter periods (like 10 days) make RSI more sensitive; longer periods (20 days) smooth it out. Adjust based on market volatility and your trading style.

4. Strict risk management During dulling phases, avoid blindly chasing highs or lows. Set clear stop-loss points to control losses. Sometimes, exiting alive is better than betting on a wrong move.

Advanced RSI usage: multi-angle analysis

( The power of the 50 midline

The RSI 50 line is a dividing line between bullish and bearish forces:

• RSI > 50: upward strength dominates, trend is more optimistic
• RSI < 50: downward strength dominates, trend is more pessimistic

Combining the 50 line with trend lines can help clarify market direction.

) Multi-period RSI strength

Don’t rely on just one RSI curve. Setting multiple RSIs with different periods (e.g., 6, 12, 24 days) can significantly improve analysis accuracy:

• Multiple RSIs below 50, forming a W pattern → bearish momentum weakening, potential rebound
• Multiple RSIs above 50, forming an M pattern → bullish momentum weakening, potential decline

Golden cross and death cross

• Golden cross: short-term RSI crosses above long-term RSI, indicating strengthening upward momentum, consider entering
• Death cross: short-term RSI crosses below long-term RSI, indicating strengthening downward momentum, consider exiting

Adjusting RSI parameters: tailor to your trading style

RSI does not have a one-size-fits-all setting; it should be adjusted based on your trading cycle and risk appetite:

Short-term traders: use shorter periods (6, 9 days), RSI reacts faster, capturing short-term fluctuations.

Mid-term traders: use the standard 14 days, balancing sensitivity and stability.

Long-term investors: use longer periods (21, 30 days), smoothing out noise and focusing on major trends.

Effects of parameter adjustment:

• Increasing the period → RSI becomes smoother, signals more stable but slower
• Shortening the period → RSI becomes more volatile, signals more sensitive but prone to false signals

In practice, start with the standard 14-day setting, get familiar with RSI logic, then fine-tune based on backtesting results.

Practical tips: RSI is not a panacea

Finally, a summary of proper RSI usage:

1. RSI is an auxiliary tool, not the sole decision-maker — price action, volume, fundamentals are also crucial
2. Divergence signals are powerful but not foolproof — always confirm with other technical indicators
3. Dulling phenomena must be taken seriously — in strong trends, RSI can fail; don’t rely blindly on signals
4. Parameter settings vary per individual — there’s no perfect setting, only the most suitable for you
5. Strict risk control is essential — avoid blindly chasing signals; set clear stop-losses to prevent large losses

RSI is an excellent technical analysis tool, but ultimately, trading tests your mindset, discipline, and risk management skills. Mastering its logic, combined with continuous practice, will significantly improve your trading success rate.