Learn to read the RSI indicator: The Great Lie Detector of the Market
What is RSI?
The RSI is a momentum-based oscillator that captures the speed and change of price movements. It operates on a scale of 0 to 100, and if you know how to read it, it's like getting an X-ray view of market moods. The best part? It's super easy to use: just place it on any chart, on any time frame, and let it do its thing.
The numbers
Above 70: Overbought Alert! If the RSI shows a reading above 70, the trading instrument may have been partying too long. Anything above 70 means it is flashing “overbought,” like a sugar high about to crash. Traders who follow the RSI often interpret this as a signal to sell and exit the asset before the line changes course and dips back below the high water mark. Sometimes, however, the price continues to rise well above 70.
Below 30: We are now in “oversold” territory; it’s like discovering a hidden gem in a bargain bin. When the RSI drops below 30, the market is saying, “This has been beaten down, but maybe, just maybe, it’s time for a recovery.” Keep in mind that sometimes the drop can continue lower.
How it is calculated
The RSI is based on relative strength: it compares the magnitude of recent gains to recent losses. Imagine a tug-of-war between bulls and bears. The RSI score tells you who is winning the battle at the moment, but it also gives clues as to who might be running out of steam.
Trade with RSI
Overbought? Maybe sell (mandatory DYOR). When the RSI hits 70 or higher, the market may be running out of gas. You may start thinking about trimming your position or at least keeping an eye out for a reversal. After all, what goes up must come down (except maybe Bitcoin BTCUSD).
Oversold? Maybe buy (obligatory DYOR). If the RSI drops to 30 or below, it could be a signal to start looking for a buying opportunity. The market is going through a crisis, and sometimes that's the signal to go bargain hunting and buy some discounted assets. Just make sure your stock or cryptocurrency of choice isn't falling for a specific reason – no indicator can save you from a real crash.
The Sweet Spot: Divergences: Have you ever noticed that the RSI and price action don't match up? That's called divergence and it's like catching the market in a lie. If the price is making new highs but the RSI isn't, or vice versa, that's a clue that something fishy is going on and you might want to keep an eye out for a price reversal.
Want to be fancy and earn bragging rights? Use the RSI on different time frames. A stock may be oversold on the daily but overbought on the weekly. By spotting the trend on different time frames, you can choose the time frame you want to trade on and follow it closely. The larger the time frame, the longer the time horizon for the move to come to fruition.