RSI (Relative Strength Index) is a technical indicator used to determine the overbought or oversold status of a financial asset and its calculation is based on the last closing price of the asset. RSI represents a value between 0 and 100 and measures momentum based on recent rises and falls in the price of a financial asset. Important levels of the RSI are considered to be 30 and 70, and crossing these levels indicates an increased likelihood of a trend change.
For example, if the RSI exceeds the 70 level, there may be a possibility of a sharp correction in the asset, while a decrease below the RSI 30 level may increase the possibility of an upward correction in the asset. RSI is a technical indicator with limits and in some cases divergences can be observed. Divergences occur when there is a divergence or inverse relationship between price movements and the RSI. In a situation called negative divergence, the price close may occur above the previous high while the RSI may be at a lower level. This indicates that the price may enter a downward trend.
Positive dissonance is the opposite of negative dissonance. If the RSI remains at a high level while the price breaks to a new low, this is called a bullish divergence and may indicate that the price may move higher. Divergences are signals that help predict the likelihood of a reversal or reversal of price movements, but they alone do not provide a reliable buy or sell signal. They need to be evaluated together with other technical analysis tools and market conditions. By using other indicators and formations in addition to the RSI, a more robust analysis can be made and more informed decisions can be made for investors.