If you have ever searched for technical analysis or trading strategies, chances are very high that you would see RSI somewhere in the search results. This is because the Relative Strength Index is a beloved technical indicator that enables traders to catch overbought and oversold conditions in the markets.
The indicator is actually very old, as it was developed by Welles Wilder in 1978 and has never lost its relevance till today. Modern traders love RSI due to its adaptability. The recent introduction of AI and machine learning has only made RSI even more popular and useful for modern investors.
Let’s check why RSI maintains its relevance, modern optimizations, and AI-driven enhancements to maximize its effectiveness.
Core RSI mechanics and default settings
RSI is calculated with the following formula:
RSI = 100 – [100 / (1 + RS)]
The RS here is as follows:
RS = (Avg Gain / Avg Loss) over a specified period (usually 14)
The values of the RSI indicator range from 0-100, and there are three key thresholds:
- 70+ Overbought condition (potential bearish reversal)
- 30- Oversold condition (potential bullish reversal)
- 50 Indecision in the market where bulls and bears are in balance
Limitations of default settings
The default setting is usually set to 14, and there are many other combinations of the best RSI indicator settings to choose from. When using RSI with default settings, the indicator tends not to provide highly accurate signals. This is even more dramatic if you try to use oversold and overbought levels signals during strong trends. If you shorted Nvidia’s stock during its rally in 2023 because the RSI indicator showed an overbought condition, you would be in a lot of trouble and lose money. The indicator also lags when using a 14-period setting despite smoothing noise. It misses rapid reversals in volatile assets like cryptos.
Optimal RSI settings
Modern traders use different configurations for different trading styles:
- Scalping – 9-10 period RSI on 1-5 minute charts is better here.
- Day trading – 15-min time frame and 14-period RSI is more useful for day trading.
- Swing trading – Daily charts with RSI settings 14-21 are preferable.
- Crypto and FX trading – 1-hour timeframe has less noise, and a 9-period RSI can be useful.
Even the most advanced AI-based AI with the most useful settings won’t provide accurate signals if you are not using additional tools for confirmation.
AI-enhanced AI – Is it the next frontier?
Modern traders who have access to AI development resources often combine RSI with other indicators like volume, moving averages, and volatility data to train neural networks and produce highly accurate RSI signals. These models can dynamically adjust thresholds according to market conditions. For example, when volatility is high the thresholds become 80/20 to reduce false signals.
Popular AI models for the RSI indicator
The most popular network architectures include LSTM, K-Means clustering, and so on. The Long Short Term Memory models have been tested to be more viable in financial trading than many other models. This is because financial markets are extremely difficult to model and predict. K-Means clustering replaces static levels with dynamic clusters. In sideways markets, thresholds tighten to 60/40, which enables traders to get early reversal signals. However, this is only effective in ranging markets and would wipe out accounts in trending markets. Using neural networks, it is possible to detect which mode the markets are in and change thresholds and even settings accordingly. By combining RSI with other indicators, these models become pretty powerful at issuing high probability trading signals.
Advanced RSI strategies that do not rely on thresholds
Since markets are trending and it becomes difficult to use RSI effectively in trending markets, many investors have developed a unique yet powerful method. They use RSI divergences, and when combined with AI, this can become truly powerful at catching price movements. In its essence, the divergence is when the RSI’s highs or lows diverge from the price’s. When using SI divergence, it is simple to combine with other confirmations for highly accurate setups. RSI is included in 99% of trading platforms, and divergence only requires the trader’s attention, which makes this method available and easy to use. However, to effectively use it, traders need to practice memorizing and recognizing the setup easily.
