Recently, I was reviewing my notes on technical analysis and spent hours studying how RSI can truly change the way you read the market. It’s not magic, but when you understand it well, it’s surprisingly effective.

RSI or Relative Strength Index is basically an oscillator that measures the magnitude of bullish versus bearish movements over a given period. Most use it with 14 periods, but you can adjust it according to your style. The good thing is it always oscillates between 0 and 100, so you have a clear framework to interpret what’s happening.

When RSI rises above 70, we’re talking about overbought conditions, suggesting the price could pull back. Conversely, when it drops below 30, it’s oversold, indicating a likely rebound. But here’s the important part: RSI alone isn’t enough. You need to validate that with the actual trend on the chart.

Look at Tesla between 2019 and 2022. In May 2019, RSI was in oversold territory, but the key was that when it moved out of that zone, the price started forming higher lows. That confirmed the bullish trend was gaining strength. Then in February 2020, it reached overbought, but the price didn’t break the previous trend, so it was just a correction. That middle level of RSI (around 50) is crucial to know if a trend is truly continuing or ending.

Now, what really fascinated me was discovering how to use divergence trading with RSI. This is where things get interesting. When the price makes higher highs but RSI makes lower highs, we’re facing a bearish divergence. It’s a very powerful signal that the market is losing strength. The opposite also works: if the price drops to lower lows but RSI makes higher lows, that’s bullish divergence and anticipates an upward change.

I saw a perfect example with Broadcom. The price kept dropping to new lows within a downtrend, but RSI was making higher lows. That divergence trading was exactly what happened afterward: the market reversed upward. And with Walt Disney, the opposite occurred. The price was rising to higher highs, but RSI was making lower highs. That bearish divergence was confirmed months later with a sustained decline.

Divergence trading is undoubtedly one of the most underrated tools in technical analysis. Many traders ignore it, but when you combine it with trend validation, your odds improve significantly.

One thing I learned is that you shouldn’t rely solely on RSI. It’s best to combine it with other indicators. For example, using RSI together with MACD is quite robust. When RSI hits overbought or oversold levels, wait for it to return to the fluctuation band, then look for the MACD to cross the histogram’s midline in the opposite direction. That gives you a solid confirmation to open a position.

With Block Inc, I saw exactly this. There was overbought RSI, then it returned to the band, and when MACD crossed downward, it confirmed the bearish trend. The trade was held until MACD crossed the signal line again. This kind of system helps you avoid getting trapped in false signals.

In the end, RSI and divergence trading are powerful tools, but they need context. Use them to increase your odds, not as an infallible system. The trend on the chart always has the last word.