Complete Guide to RSI｜Reading, Settings, Entries and Testing
RSI is a popular oscillator for gauging overbought and oversold conditions. This guide covers reading RSI, its period, entries, exits and testing in ENTRIQ.
The big picture of RSI (how to use this guide)
This guide serves as a hub for the topics covered in the RSI series. For the basics of RSI, such as its meaning, calculation and how to read it, see What Is RSI. Here we only give an overview of each topic and guidance on which article to read.
How to read RSI (overview)
Commonly used rules of thumb are: 30 or below = oversold / 70 or above = overbought / 50 = a reference level for gauging whether bullish or bearish momentum dominates, plus a mismatch between the direction of price and RSI = divergence (a sign of a possible reversal). None of these is a guaranteed signal; they are only rules of thumb, and in a strong trend RSI can stay pinned at 30 or below, or at 70 or above. How to read each level in detail is explained in What Is RSI.
RSI settings (overview)
The standard period is 14. A shorter period reacts faster but also produces more false signals, while a longer period is more stable. There is no single right answer; the starting point is to check it on your own timeframe. How to set it up and where to find the setting in each tool are covered in How to Set Up RSI.
Trading with RSI (overview)
Trading with RSI includes contrarian trading, which aims for a bounce from oversold levels (30 or below), and trend following, which rides the trend when RSI crosses above 50. In both cases, the basic approach is to define the entry condition in words or numbers and pair it with an exit condition. Contrarian trading with RSI is explained in How to Trade RSI Reversals.
Markets where RSI works less well (overview)
RSI is not a cure-all. Especially in markets with a strong trend, RSI can stay pinned at 30 or below while price keeps moving, which makes contrarian trades less effective. Which conditions bring more false signals is covered in When RSI Works Less Well.
Evaluating RSI through backtesting｜Assessing its effectiveness with your own data
The rules of thumb so far are generalizations. How RSI actually performed for the instruments you trade and on your timeframe can only be found out through backtesting. In ENTRIQ's Chart Replay, you can display RSI and test it repeatedly on historical charts. How to set test conditions is covered in How to Backtest RSI (aggregating your records and organizing patterns with AI analysis also fit into this workflow).
Frequently asked questions (FAQ)
Q. What is RSI? A. It is an oscillator that compares the size of price gains and losses over a set period and expresses overbought or oversold conditions on a scale of 0 to 100. 30 or below is generally treated as oversold, and 70 or above as overbought. Q. Is 14 the best RSI period? A. 14 is the standard, but it isn't necessarily the best. A shorter period reacts faster but also produces more false signals. The starting point is to backtest it on your own timeframe. Q. In what situations is RSI used? A. It is used for contrarian trades that aim for a bounce from oversold levels, trend-following trades that ride the trend above 50, and divergence to look for reversals. How to use it for each purpose is explained in the individual articles. Q. Can RSI be used for Japanese stocks? A. It can be used as an indicator, but backtesting in ENTRIQ supports US stocks, FX, commodities and crypto (Japanese stocks are not supported).
What this article covered
- RSI is an oscillator that measures overbought and oversold conditions on a scale of 0 to 100; the main rules of thumb are 30, 70, 50 and divergence.
- Reading RSI, settings, contrarian trading and markets where it works less well are each covered in depth in individual articles.
- Whether these rules of thumb hold in your own markets should be checked through backtesting.
Related articles
This article is for informational purposes only and does not recommend any specific trade or the use of any indicator. All investment decisions are your own responsibility.
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