In-depth Analysis of Relative Strength Index (RSI): Mastering the Core Strategies for RSI Divergence and Diminishing Signals

In the world of technical analysis, the RSI indicator can be regarded as a Swiss Army knife in an investor’s toolkit. Whether you’re a newcomer to the market or an experienced trader, this tool can help you grasp market dynamics more accurately. However, many have suffered losses due to issues like RSI divergence and stagnation. Today, we will delve deeply into the mysteries of this indicator.

What is the Relative Strength Index (RSI)?

RSI (Relative Strength Indicator) is a technical tool used to measure the comparison of buying and selling forces in the market. It reflects the current bullish or bearish trend by calculating the recent upward and downward price movements of stocks or cryptocurrencies.

Compared to other complex technical indicators (such as MACD), RSI’s calculation logic is simple and intuitive, requiring only basic arithmetic operations, making it one of the easiest tools to master in technical analysis. This is also why RSI is widely used across stock, cryptocurrency, and other markets.

RSI Calculation Principles

Understanding how RSI is calculated can help you better utilize this indicator. Its core idea is to compare the magnitude of recent gains and losses over a certain period.

Step 1: Determine the time period

Typically, a 14-day period is chosen as the standard (also called 14-day RSI).

Step 2: Calculate average gains and losses

• Sum all upward price changes over 14 days and divide by 14 to get the “average upward movement”
• Sum all downward price changes over 14 days and divide by 14 to get the “average downward movement”

Step 3: Calculate the Relative Strength (RS)

RS = Average Upward Movement ÷ Average Downward Movement

Step 4: Convert to RSI value

RSI = 100 - (100 ÷ (1 + RS))

The resulting RSI value ranges between 0 and 100. The two most critical thresholds are:

• Overbought zone (RSI > 70): Market is overbought and may face a correction risk
• Oversold zone (RSI < 30): Market is oversold and may rebound

RSI Divergence: A Key Signal for Market Reversal

RSI divergence is one of the most predictive phenomena in technical analysis. It refers to a clear mismatch between the price trend and the RSI indicator.

Simply put, when the price hits a new high or low but RSI does not, this constitutes divergence, often indicating an impending trend reversal.

( Top Divergence (Bearish Signal)

This occurs when the price reaches a new high, but RSI fails to do so and instead declines.

Case Study: Take Bitcoin as an example. The price rose from $70,000 to $100,000, setting a new high, but at the same time, RSI dropped from 82 to 58. This situation indicates that although the price is rising, buying momentum is waning, and upward energy is depleting. Investors should consider reducing positions or exiting to avoid subsequent corrections.

( Bottom Divergence (Bullish Signal)

This occurs when the price hits a new low, but RSI remains relatively stable or even rises.

This often means that although the market is declining, selling pressure has weakened significantly, increasing the likelihood of a rebound. Investors can consider gradually building positions and waiting for a market reversal.

) Correct Use of Divergence

The essence of divergence is market sentiment imbalance. When investor sentiment is pushed to extremes, it often leads to emotional bursts and price reversals. However, divergence is not an absolute predictive tool; attention should be paid to:

• If RSI frequently crosses the 50 midline during divergence formation, it indicates the market is still oscillating and no clear reversal pressure has formed
• In strong upward or downward trends, divergence may persist for a long time; avoid blind trading
• Always combine with other technical indicators (like moving averages, volume) for comprehensive judgment

RSI Stagnation Phenomenon and Countermeasures

The fatal weakness of RSI is stagnation. When the market is in a strong unidirectional move, RSI may stay in overbought (>70) or oversold (<30) zones for a long time, reacting sluggishly to price changes.

For example, during a strong upward trend, RSI might stay above 80, seemingly issuing a “sell” signal, but prices continue to rise. At this point, traditional overbought signals become invalid. Blindly acting on these signals can trap investors.

) Four Strategies to Deal with Stagnation

1. Combine Trend Analysis

Even if RSI is at extreme levels, first confirm whether the main trend is truly reversing. Sometimes, stagnation reflects high market consensus; in such cases, do not rush to counter-trend operations.

2. Use Multiple Indicators for Confirmation

Use moving averages to judge trend direction, MACD to confirm momentum changes, volume to verify buying and selling strength. Form a “voting system” with multiple indicators to improve accuracy.

3. Adjust RSI Parameters

• Shorten the period (to 6-day, 9-day): makes RSI more sensitive, quickly reflecting market changes, suitable for short-term trading
• Extend the period (to 20-day, 30-day): smooths RSI fluctuations, filters out short-term noise, suitable for medium to long-term investing

4. Strict Risk Management

During stagnation, avoid chasing highs or selling lows. Set reasonable stop-loss points, control individual trade losses, and protect capital.

Advanced Application: How to Use RSI for Market Analysis

RSI and the 50 Midline: The Divide Between Bulls and Bears

The 50 midline is a key boundary in RSI, representing market equilibrium:

• RSI > 50: Bullish momentum dominates, market may continue upward
• RSI < 50: Bearish momentum dominates, market may continue downward

However, if RSI oscillates around 50 frequently, it indicates a balanced market in a range-bound phase, difficult to form a clear reversal.

Multi-Period Resonance Analysis

Using multiple RSI lines of different periods (e.g., 6-day, 12-day, 24-day) can significantly improve analysis accuracy:

W Pattern: Multiple RSI lines all below 50 forming a W shape, indicating exhaustion of the bears and potential rebound.

M Pattern: Multiple RSI lines all above 50 forming an M shape, indicating weakening of the bulls and possible reversal downward.

Golden Cross and Death Cross

Crossovers between different period RSI lines can signal strong market movements:

• Golden Cross: Short-term RSI crosses above long-term RSI, indicating strong upward momentum, a potential buy signal
• Death Cross: Short-term RSI crosses below long-term RSI, indicating strong downward momentum, a potential sell signal

Extreme Values for Overbought and Oversold

• RSI > 80: Market is in a severe overbought zone, higher risk
• RSI < 20: Market is in a severe oversold zone, larger rebound potential

In strong trend phases, these extreme signals may lose validity; always combine with trend and other indicators.

Scientific Setting of RSI Parameters

Different trading styles require different RSI parameters:

Short-term traders: Use shorter periods (6-day, 9-day) to make RSI more sensitive and catch short-term turning points faster.

Medium-term traders: Choose the standard 12-day or 14-day parameters, balancing sensitivity and stability.

Long-term investors: Use longer periods (20-day, 30-day) to filter out short-term fluctuations and see the medium to long-term trend.

The key is to adjust according to your trading cycle and style, rather than blindly applying fixed parameters.

Summary: Core Tips for Rational Use of RSI

RSI is a powerful technical tool but has its limitations. To truly master it, remember these points:

1. RSI divergence is an important warning: When price and RSI diverge, it often signals a trend reversal, but not an absolute certainty
2. Beware of stagnation traps: In strong trending markets, RSI can stagnate; in such cases, trust the trend rather than the indicator
3. Use multiple indicators together: Never rely solely on one indicator; use multiple tools for mutual verification
4. Adjust parameters flexibly: Dynamically modify RSI periods based on market environment and your trading style
5. Risk management always comes first: No matter how strong the indicator signals, proper risk control and position management are essential for survival

Mastering the response to RSI divergence and stagnation will help you avoid many pitfalls and improve your trading success rate.