What does the true RSI formula tell you - Why do professional traders get rich while beginners still incur losses

Have you ever wondered what the actual purpose of the RSI formula everyone uses is? But when you apply this tool in the market, you often encounter pitfalls and keep losing money. The problem lies here — you might have received incorrect advice or misunderstood what the RSI formula is really telling you. Let’s clarify it properly.

The core misunderstanding about RSI from the start

Before diving into the complex RSI formula, I need to tell you that most people’s understanding of RSI is fundamentally wrong.

Many beginner traders often hear: “Buy when RSI is below 30 (Oversold) and sell when RSI is above 70 (Overbought).” It sounds simple and effective. But why do some people follow this and still keep losing?

Because that idea does not account for strong trends.

Suppose the market price is rising sharply, and RSI stays above 70 for a long time. You see it as overbought and rush to sell — but the result is a loss because the market continues to go up. This is the most dangerous trend against approach.

So, before explaining the RSI formula, you need to understand something first.

What is the RSI formula: what does it calculate and what does it mean?

RSI stands for Relative Strength Index. It’s not an outside guess tool but a momentum measurement developed and first published by J. Welles Wilder Jr. in 1978.

The term “Relative Strength” here does not mean comparing two assets (like Coin A vs. Coin B), but refers to comparing buying strength versus selling strength within that asset itself.

Simply put: RSI is measuring “who is controlling the market — buyers or sellers?”

How the RSI formula is actually calculated — no need to do the math yourself

Let’s look at the real formula. Although most trading platforms (like Gate.io or Mitrade) calculate it automatically, understanding how it works will help you use it more wisely.

The core of the RSI formula involves a variable called RS (Relative Strength).

RS = Average Gain / Average Loss

Where:

• Average Gain: the average of upward closing candles (price increases) over 14 periods
• Average Loss: the average of downward closing candles (price decreases) over the same period

Then RSI uses RS to compute:

RSI = 100 - (100 / (1 + RS))

The result always ranges between 0 and 100.

What you really need to grasp about RSI

• If Average Gain > Average Loss: prices are rising more than falling, RSI will move above 50
• If Average Gain < Average Loss: prices are falling more than rising, RSI will move below 50
• If Average Gain equals Average Loss: RSI = 50 exactly

The 50 line is the true equilibrium point, not 70 or 30.

This fundamental understanding will change how you trade because most focus only on 70 and 30.

Divergence and Failure Swing — signals that pros really like

If the basic RSI formula is level 1, then Divergence and Failure Swing are level 2 for traders.

Divergence: a warning signal

Divergence occurs when price and RSI move in opposite directions. It’s a warning that “the current trend is losing strength.”

There are two types:

Bullish Divergence

• Occurs in a downtrend: price makes a new low, but RSI does not follow down; instead, it makes a higher low
• Meaning: selling pressure is weakening, market may be preparing to rebound
• Most significant when RSI is in the Oversold zone (<30)

Bearish Divergence

• Occurs in an uptrend: price makes a new high, but RSI makes a lower high
• Meaning: buying momentum is waning, market may be ready to retreat
• Most significant when RSI is in the Overbought zone (>70)

Failure Swing: a strong confirmation of reversal

The creator of RSI, J. Welles Wilder Jr., stated that Failure Swing is the strongest signal confirming a trend reversal.

Failure Swing Top (downtrend)

• RSI rises above 70, then drops below its previous low
• This confirms momentum shifting from bullish to bearish → sell signal

Failure Swing Bottom (uptrend)

• RSI drops below 30, then rises above its previous high
• Confirms momentum shifting from bearish to bullish → buy signal

Why do pros prefer Failure Swing over Divergence? Because Failure Swing confirms the change — it’s not just a warning.

Strong trend vs. sideways market — how RSI differs

This is the most important part explaining why 70/30 often fails.

In a strong uptrend

RSI rarely drops below 30; it stays in a high range, roughly 40-90.

• The 40-50 zone acts as a new support level
• Pros wait to buy near 40-50, not at 30
• They avoid selling at 70, which would be going against the trend

In a strong downtrend

RSI rarely rises above 70; it stays in a low range, roughly 10-60.

• The 50-60 zone acts as a new resistance
• Pros wait to sell near 50-60, not at 70
• They avoid buying at 30, as price may not reach that level

In sideways (range-bound) markets

This is where 70/30 works well:

• Buy near 30 at support
• Sell near 70 at resistance

Comparison table:

The 50 line and Centerline Crossover — another powerful tool

The 50 line is the true equilibrium point. Pros use it as a compass for the main trend:

• RSI > 50: bullish mode, buying pressure dominates → consider buying or holding long
• RSI < 50: bearish mode, selling pressure dominates → consider selling or holding short

Using the Centerline Crossover means waiting for RSI to cross above or below 50 to confirm trend change. Simple but highly effective.

Limitations of RSI and practical solutions

No indicator is 100% accurate.

Limitations of the RSI formula

1. False signals: in choppy markets, RSI gives many false alerts
2. Fails in strong trends: RSI stays at 70/30, prompting traders to go against the trend
3. Lagging indicator: based on past data (14 candles), so it lags behind price
4. Divergence doesn’t always mean reversal: it can persist for a long time before actual change

How to fix this: never rely on RSI alone

Method 1: Combine RSI with Price Action

• Watch key support/resistance levels
• Buy when RSI hits 30 and price is at key support
• Sell when RSI shows Bearish Divergence and price hits resistance

Method 2: Combine RSI with MACD (the best duo)

• MACD confirms trend direction
• RSI indicates entry timing
• Wait for RSI Bullish Divergence and MACD crossover for a strong signal

Live gold trading example — how pros do it

Let’s simulate a scenario on XAUUSD (gold) on platforms like Gate.io or Mitrade, timeframe 4H.

Step 1: Big picture analysis

• Check Daily chart: gold is rising but approaching resistance at $4,250

Step 2: Look for warning signs

• Price makes a new high, but RSI doesn’t follow — Bearish Divergence
• Warning sign

Step 3: Wait for confirmation

• RSI breaks below previous low (Failure Swing)
• RSI crosses below 50 (Centerline Crossover)
• Price forms Bearish Engulfing candle at resistance

Step 4: Enter short position

• When multiple signals align, open sell

Step 5: Set stop-loss and take-profit

• Stop Loss above recent high (above $4,250)
• Take Profit at previous support (~$3,879)

This multi-layer confirmation increases your win rate.

Final summary — RSI is not a crystal ball

RSI is an excellent momentum indicator, not a predictor of reversals.

• Mistakes come from misunderstanding, not the tool itself
• Divergence, Failure Swing, Centerline are techniques pros use
• Never rely solely on RSI — combine with Price Action or MACD for stronger signals
• Trend strength influences RSI — in strong trends, avoid going against it

Whether trading Forex, gold, oil, or crypto on Gate.io or other platforms, understanding the true purpose of RSI can turn losses into profits.

Prepare to trade now — don’t miss out!

Investing involves risks. This article is for educational purposes only.