What Is the Relative Strength Index (RSI)?
The Relative Strength Index (RSI) is a momentum oscillator developed by J. Welles Wilder Jr. in 1978. It measures the speed and magnitude of recent price changes to evaluate whether an asset is overbought or oversold. In MT4, it's one of the most commonly used built-in indicators and is available across all instruments and timeframes.
How RSI Is Calculated
RSI is plotted on a scale from 0 to 100 and is calculated using the following formula:
RSI = 100 – [100 / (1 + RS)]
Where RS = Average Gain over N periods ÷ Average Loss over N periods.
The default period setting in MT4 is 14, meaning the RSI looks at the past 14 candles. You can adjust this in the indicator settings.
Adding RSI to a Chart in MT4
- Open any currency pair chart in MT4.
- Go to Insert → Indicators → Oscillators → Relative Strength Index.
- In the settings window, set the Period (default is 14).
- Set Overbought level to 70 and Oversold level to 30.
- Click OK — the RSI panel will appear below your price chart.
Reading RSI: Key Levels Explained
| RSI Level | Interpretation | Potential Signal |
|---|---|---|
| Above 70 | Overbought territory | Possible reversal or pullback downward |
| Below 30 | Oversold territory | Possible reversal or bounce upward |
| 50 Midline | Momentum neutral | Trend direction indicator |
Three Ways to Trade Using RSI
1. Overbought / Oversold Signals
The classic RSI approach: when RSI rises above 70, the market may be overextended and due for a correction. When RSI drops below 30, selling pressure may be exhausted. Important: In strong trends, RSI can remain overbought or oversold for extended periods — don't trade against the trend blindly.
2. RSI Divergence
Divergence occurs when the price chart and RSI move in opposite directions:
- Bearish Divergence: Price makes a higher high, but RSI makes a lower high. This suggests weakening bullish momentum and a possible reversal downward.
- Bullish Divergence: Price makes a lower low, but RSI makes a higher low. This suggests weakening bearish momentum and a possible upward reversal.
Divergence signals are considered stronger than simple overbought/oversold readings because they reflect genuine shifts in market momentum.
3. The 50-Level Crossover
Some traders use RSI crossing above or below the 50 midline as a trend confirmation tool:
- RSI crossing above 50 → bullish momentum is dominant.
- RSI crossing below 50 → bearish momentum is dominant.
Adjusting RSI Period Settings
The default 14-period RSI suits most swing traders, but you can modify it to suit your style:
- Shorter period (e.g., 7–9): More sensitive, generates more signals, suits short-term traders.
- Longer period (e.g., 21–25): Smoother, fewer false signals, suits position traders.
Common RSI Mistakes to Avoid
- Trading RSI in isolation: Always confirm RSI signals with price action or another indicator.
- Fading strong trends: In a powerful uptrend, RSI can stay above 70 for a long time — shorting every overbought reading can be costly.
- Ignoring the timeframe: RSI signals on a 15-minute chart are less reliable than those on a daily chart.
Summary
The RSI is a versatile, easy-to-read indicator that belongs in every MT4 trader's toolkit. Whether you're hunting divergences, identifying momentum shifts, or filtering entries, RSI adds a valuable momentum dimension to your technical analysis. Use it as part of a broader trading system, and always combine it with sound risk management.