What is Relative Strength Index (RSI)?
The Relative Strength Index (RSI) is a momentum oscillator that measures how quickly and how strongly price has moved recently. It helps traders determine whether a market may be overbought or oversold.
RSI values range from 0 to 100. Readings above 70 typically suggest the market may be overbought, while readings below 30 often indicate the market may be oversold.
How to Add the Indicator
- Open your charting platform such as TradingView, NinjaTrader, or Tradovate.
- Search for “RSI” or “Relative Strength Index” in the indicators menu.
- Add it to your chart. The default period is usually 14, meaning it analyzes the last 14 candles.
How Traders Use It
Futures day traders commonly use RSI to:
- Spot potential reversals: When RSI rises above 70, it may signal a possible pullback. When RSI falls below 30, price may be approaching a potential bounce.
- Confirm entries: Some traders look for RSI to climb from oversold levels before entering long positions, or drop from overbought levels before entering short positions.
- Identify divergence: If price makes a new high but RSI does not, it can signal weakening momentum. This is known as bearish divergence.
Why It Matters
RSI provides a quick snapshot of whether a futures market may be overextended. This can help traders avoid entering trades when a move is already losing momentum.
While RSI is not perfect on its own, combining it with price action, support and resistance, or trend analysis can help traders make more disciplined decisions.
Something to Consider
RSI is a powerful momentum tool, but it should always be interpreted in context. In strong trends, RSI can remain overbought or oversold for long periods while price continues moving in the same direction.
New traders sometimes assume that an RSI reading above 70 automatically means the market should fall, or that a reading below 30 means it must rise. In reality, these signals should be confirmed with broader market structure.
- During strong uptrends, RSI can stay elevated while price keeps rising.
- During downtrends, RSI can stay low as price continues falling.
For futures traders, RSI tends to work best when combined with trend structure or divergence analysis. Adjusting the lookback period, such as using 7 or 21 instead of 14, can also change how sensitive the indicator is to price movements.
Brief History of RSI
The Relative Strength Index was created by J. Welles Wilder Jr. and introduced in his 1978 book New Concepts in Technical Trading Systems.
Wilder designed RSI to measure the internal strength of price movement by comparing a market’s average gains to its average losses over a specific period, usually 14.
The indicator quickly became popular because it provided a clear numerical view of market momentum. As charting software evolved through the 1980s and 1990s, RSI became a default feature on nearly every trading platform.
Today RSI remains one of the most widely used indicators in technical analysis. Traders value it for its simplicity and its ability to highlight shifts in buying and selling pressure. Wilder also developed other major indicators such as the Average True Range (ATR).
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