The RSI (Relative Strength Index) is a momentum-based oscillator that measures the speed and change of price movements, operating on a scale from 0 to 100. It's a straightforward tool that can be applied to any chart and timeframe, offering insights into the market's trends.
When the RSI goes above 70, it signals that the asset may be overbought, indicating a possible upcoming price reversal. This level suggests that traders might consider selling before the price drops. However, prices can continue to rise above 70 before eventually reversing.
On the flip side, when the RSI falls below 30, the asset might be oversold, potentially presenting a buying opportunity. This level indicates that the market might have pushed the asset down too far, suggesting a possible rebound. But, it's essential to be cautious, as prices can continue to drop even further.
RSI is calculated by comparing recent gains to recent losses, essentially reflecting the balance between bullish and bearish forces. When RSI reaches 70 or higher, it might be a sign that the market is losing steam, and it could be time to consider selling. Conversely, if RSI falls to 30 or lower, it might be a good time to buy, but always do your research.
Divergences between RSI and price action can be especially telling. If the price is making new highs or lows but the RSI isn't, this could signal a potential reversal. Lastly, using RSI across different timeframes can provide deeper insights—an asset might be oversold in the short term but overbought in the longer term.
