What is RSI?

The Relative Strength Index (RSI) is a momentum indicator that compares the speed and amplitude of recent market movements to determine if an asset is overbought or oversold.

It operates on a scale of 0 to 100, with readings above 70 indicating that the price is overbought and likely to fall, and readings below 30 indicating that the price is oversold and may recover. RSI is used by traders to predict future reversals, measure trend strength, and identify momentum shifts, notably via indicators like RSI divergence.

How the RSI Indicator Works

The Relative Strength Index (RSI) determines if an asset is overbought or oversold by looking at the frequency and size of recent market movements. It returns a value between 0 and 100 based on recent gains and losses over a set time (often 14 candles). When prices unexpectedly rise, the RSI increases; when prices fall sharply, the RSI decreases. Numbers larger than 70 indicate that the market is overbought and may decline, while numbers less than 30 indicate that it is oversold and may recover. Because it responds swiftly to changes in momentum, RSI can assist traders in identifying potential reversals, early indicators of trend weakness, and the overall strength of price movements. And the total amount of pricing adjustments.

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• • RSI measures momentum using recent gains vs losses.

 

• • · It uses a standard setting of 14 periods.

 

• • · RSI values range from 0 to 100.

 

• • · Above 70 = Overbought (price may be too high)

 

• • · Below 30 = Oversold (price may be too low)

 

• • · Strong upward moves push RSI higher; strong downward moves push it lower.

 

• • · Helps spot reversals, momentum strength, and divergence between price and indicator.

 

• •  Useful in ranging markets for timing entries/exits.

How to interpret the RSI indicator

Overbought and Oversold

 Above 70 → Overbought:

Price may have risen too quickly.

 

• • · A pullback or reversal downward can occur.

 

• • · Traders may look for sell or take-profit opportunities.

Below 30 → Oversold:

 

• • · Price may have dropped too quickly.

 

• • · A bounce or reversal upward can occur.

 

• • · Traders may look for buy or dip-buying opportunities.

Trend & Center Level

RSI crossing the 50 level helps identify trend direction.

Above 50 → Bullish: Price is gaining strength.

Below 50 → Bearish: Price is losing strength.

Divergence

Divergence shows an early sign of a possible reversal.

Bullish Divergence

 

• • Price makes a lower low.

• • RSI makes a higher low
    → Selling pressure is fading → possible upward reversal.

Bearish Divergence

 

• • Price makes a higher high.

• • RSI makes a lower high
    → Buying pressure is fading → possible downward reversal.

How to Use RSI in Trading

Buy/Sell: A common strategy is to buy when the RSI is oversold (less than 30) and sell when it is overbought (more than 70). These levels indicate when the market may be stretched and due for a reversal or downturn.

Trend Following: Use the 50 level to stay aligned with the trend.

 

• • In an uptrend: look for buy opportunities when RSI dips below 50 and then moves back above it.

• • In a downtrend: look for sell opportunities when RSI rises above 50 and then drops back below it.
    The 50 level acts as a momentum filter.

Breakout Confirmation:

When price breaks out of a range, a move of the RSI into the overbought or oversold zone can assist indicate that the breakout has high momentum and is likely to persist.

Conclusion for RSI

The RSI is a highly effective indicator for predicting potential reversals and estimating the rate of price movement. Traders can use the 50 level to identify overbought and oversold conditions and stay on track with the trend. The RSI is especially useful for identifying whether a breakout is strong or weak in response to momentum shifts. When used appropriately, it provides obvious buy/sell options while filtering out false signals by distinguishing.