I just reviewed my trading strategy and realize that many people don’t make good use of the RSI. It’s not just another indicator; it’s a tool that can change how you see markets if you truly understand it.

The RSI or Relative Strength Index measures the speed and magnitude of price changes. The interesting part is that it operates on a fixed scale from 0 to 100, allowing you to clearly see when an asset is in extreme territory. When it rises above 70, the market is overbought. Below 30, it’s oversold. But here’s what many miss: these extremes can last a long time if the trend is strong.

I mainly work with the 50 level of the RSI. It’s like an invisible equilibrium point that tells you whether a trend is truly consolidating or if a change is about to happen. When the RSI oscillates between 50 and 70, the price tends to go up. Between 50 and 30, it tends to go down. Simple, but effective.

Now, what really interests me is when the price and the RSI are not in agreement. That’s pure RSI divergence. I’ve seen incredible cases where the price makes increasingly higher highs, but the RSI makes increasingly lower highs. That’s bearish divergence and a serious warning that momentum is waning.

I remember when Tesla was in a strong uptrend in 2020 and 2021. The RSI hit overbought levels again and again, but kept bouncing from the middle level without falling further. That confirmed the trend was still alive. But in October 2021, something changed. The RSI failed to reach previous overbought extremes while the price kept rising. That RSI divergence was the warning I needed. Weeks later, the trend broke.

Bullish RSI divergence is the opposite. The price drops to lower lows, but the RSI makes higher lows. It means sellers are getting tired and buyers are gaining strength. I saw this with Broadcom in 2022, and it worked perfectly. The price kept falling a bit more, then rebounded strongly.

What I learned is that RSI divergence isn’t an isolated signal. You need to validate it with a break of a previous trendline. If the RSI shows divergence but the price doesn’t break the trend, you wait. The indicator is leading, but you need price confirmation to act.

I combine RSI with MACD when I want more robust signals. I wait for RSI to reach an extreme, then for it to return to the middle band, and finally for MACD to cross its signal line in the opposite direction of the trend. That gives me the confirmation I need to open a position. With Block Inc. in 2021, it worked well. I waited for overbought, RSI divergence formed, MACD confirmed, and I had a good short trade.

The key is not to obsess over a single indicator. RSI is powerful, RSI divergence is a serious signal, but they are tools that should be complemented. Trend analysis remains fundamental. If the price doesn’t break a trendline, no oscillator will get you out of that position with a profit.