The Relative Strength Index (RSI) is a technical indicator used in financial market analysis to measure the speed and change of an asset's price movements. It is an oscillator that fluctuates between 0 and 100, and is particularly useful for identifying overbought or oversold conditions in the market.
The importance of the 80 and 20 levels in the RSI lies in their ability to signal extremes in the price of an asset. Traditionally, it is considered that:
- An RSI above 70 indicates that an asset may be overbought.
- An RSI below 30 suggests that an asset may be oversold.
However, setting these thresholds to 80 and 20 can provide more conservative and potentially more reliable signals. Raising the overbought threshold to 80 reduces the likelihood of a false signal as a more extreme overbought condition is expected before considering a sale. Similarly, lowering the oversold threshold to 20 looks for a more extreme oversold condition before considering a purchase.
These adjusted levels help traders:
- Minimize errors: Being more restrictive, there are fewer signals, but these tend to be more reliable.
- Identify strong trends: An RSI that remains above 80 or below 20 can indicate a very strong trend in the corresponding direction.
It is important to remember that no indicator is foolproof and the RSI, like any other technical indicator, should be used in conjunction with other tools and analysis to make informed investment decisions.
