RSI and divergences
Lesson 14 of 23 in the course “Technical Analysis”. Free, with animations and a quiz.
The move’s speedometer
RSI was created by Welles Wilder and described in his 1978 book. It compares the average gain and average loss over 14 candles and squeezes the result into a 0 to 100 scale. The classic bounds are 70 and 30: above 70 the market is overbought, below 30 oversold. In TradingView it’s the Relative Strength Index indicator, and its defaults are exactly 14 and 70/30.
Overbought doesn’t mean “sell”
The biggest beginner mistake is selling as soon as RSI goes above 70. In a strong trend RSI can stay overbought for weeks while price keeps climbing. Overbought only means the move was fast. A decision needs context: a level, the structure, a divergence.
Divergence
A divergence is when price and RSI disagree. Bearish: price makes a new high while RSI is below its last one. So the rise is getting weaker. Bullish is the opposite, at the lows. Divergence is one of the most useful uses of RSI, but it’s a warning, not a button: wait for a structure break to enter.
RSI shifts its range in a trend
Analysts Andrew Cardwell and Constance Brown noticed that in an uptrend RSI usually lives between 40 and 80, and in a downtrend between 20 and 60. Hence a practical rule: in an uptrend an RSI dip to 40–50 is a place to look for a buy, not a reason to panic. And remember: TradingView’s free plan fits only 2 indicators on a chart, so choose wisely.
Check yourself
- RSI is 78 and price is in a strong uptrend. What’s sensible?
Correct answer: Don’t short just because of it: in a trend RSI can stay high a long time. Overbought in a trend is a sign of strength. Decisions come from structure and levels; RSI only adds to the picture. - Price highs: 112 and 114. RSI at them: 74 and 63. What is it?
Correct answer: A bearish divergence. Price higher, indicator lower: a divergence at the highs. The rise is weakening. - Uptrend, RSI dipped from 75 to 45. How do you read it?
Correct answer: A normal pullback in the trend, a zone to look for a buy. In an uptrend RSI usually stays above 40. A dip to 40–50 is a common spot where the trend resumes.