How is the RSI (Relative Strength Index) Used to Spot Momentum?

Takah Rahman

The trading world, whether in Forex or Crypto, is often described as a battle between bulls and bears. To gain an edge, traders rely on technical indicators to measure the intensity of this battle and, crucially, to spot momentum. Among the most popular and time-tested tools for this purpose is the Relative Strength Index (RSI).

This piece, brought to you by the team at Backcom App, dives deep into how this oscillator works, how to interpret its signals for momentum changes, and how to effectively integrate it into your trading strategy.

What is the Relative Strength Index (RSI)?

The RSI, developed by J. Welles Wilder Jr. in 1978, is a momentum oscillator that measures the speed and change of price movements. It calculates the magnitude of recent price gains versus recent price losses to evaluate overbought or oversold conditions in the price of a stock, currency pair, or cryptocurrency.

The indicator is displayed as a single line graph that oscillates between zero and 100. The standard lookback period for the RSI is 14 periods (e.g., 14 days, 14 hours, etc.).

Using RSI to Identify Momentum and Market Extremes

The primary use of the RSI is to identify when a market is too far out of line with its recent performance—a sign that the current momentum may be nearing exhaustion and a reversal is imminent.

Overbought and Oversold Zones

The two most important levels on the RSI are 70 and 30.

RSI Above 70 (Overbought): When the RSI crosses above 70, it signals that the asset (e.g., BTC/USDT or EUR/USD) has been bought too aggressively, and the upward momentum may be stretched. This suggests that a downward correction or a consolidation phase is likely. It does not mean you must sell immediately, but rather that you should be cautious about opening new long positions.
RSI Below 30 (Oversold): When the RSI crosses below 30, it indicates that the asset has been sold off too heavily, and the downward momentum might be overextended. This suggests a bounce or a reversal to the upside is probable. It does not mean you must buy immediately, but it signals a potential opportunity for long positions.

Identifying Momentum Strength

Beyond the 30 and 70 lines, the RSI can also gauge the strength of the current trend's momentum:

Strong Bullish Momentum: In a strong uptrend (common in Crypto bull markets), the RSI will tend to hold above 50 and frequently test or exceed 70. The 40-50 area often acts as support during minor pullbacks.
Strong Bearish Momentum: In a strong downtrend (common in Forex pairs after major news events), the RSI will tend to hold below 50 and frequently test or fall below 30. The 50-60 area often acts as resistance during brief rallies.

The 50-level is a crucial midpoint. A cross above 50 generally indicates a shift toward bullish momentum, and a cross below 50 signals a shift toward bearish momentum.

Read more:

The Power of RSI Divergence: Spotting Momentum Shifts

Perhaps the most insightful way to use the RSI to spot future momentum changes is through divergence. Divergence occurs when the price action of an asset and the RSI indicator move in opposite directions, suggesting that the underlying momentum is weakening even if the price continues to move.

Regular Bearish Divergence (Sell Signal)

This is a powerful warning sign, particularly in markets like Forex, where trend following is prevalent.

Price: Makes a higher high (H.H.).
RSI: Makes a lower high (L.H.).

Interpretation: The price is reaching new highs, but the RSI is failing to confirm the strength of the move. This is evidence that the buying momentum is fading, and a reversal to the downside is likely.

Regular Bullish Divergence (Buy Signal)

This is a strong indicator of bearish exhaustion and an impending upward move.

Price: Makes a lower low (L.L.).
RSI: Makes a higher low (H.L.).

Interpretation: The price is making a new low, but the RSI is showing improvement, indicating that the selling momentum is weakening. This suggests that a reversal to the upside is likely.

Integrating RSI into Your Trading Strategy (EEAT Principle)

As an expert in technical analysis, the Backcom App team emphasizes that the RSI should rarely be used in isolation. Its strength is amplified when combined with other elements.

Combining with Support and Resistance (S/R)

The most effective trades using RSI occur when its signals align with key structural levels:

Example: A Crypto asset like ETH hits a major historical support level, AND the RSI simultaneously shows a bullish divergence or moves from oversold (below 30) back above 30. This confluence creates a high-conviction long signal.

Combining with Trend Lines and Moving Averages

The RSI can confirm the health of a trend identified by other tools: If the price is trending above a 200-period Moving Average, and the RSI briefly dips below 50 and then reverses back up, it signals that the pullback is over and the primary bullish momentum is resuming.

Conclusion

The Relative Strength Index (RSI) is an indispensable tool for technical traders in both the fast-paced Crypto and the liquid Forex markets. It provides a quick, quantifiable measure of momentum and market sentiment.

Author: Takah Rahman