Relative Strength Index (RSI)
A momentum oscillator that measures the speed and magnitude of price movements on a scale from 0 to 100.
Plain English Explanation
The RSI is like a speedometer for price momentum. It tells you how fast price is moving up or down compared to recent moves.
**Simple way to think about it:** Imagine a rubber band. The more you stretch it (price moves too fast), the more likely it will snap back. RSI measures how "stretched" the price is.
**The numbers:**
- Above 70 = "Overbought" - Price has risen fast, might need a breather
- Below 30 = "Oversold" - Price has fallen fast, might bounce
- 50 is neutral - Price momentum is balanced
**Important:** RSI doesn't predict reversals! It only shows current momentum. In strong trends, RSI can stay overbought or oversold for a long time.
How It Works (Technical)
RSI calculates the ratio of recent upward price movements to downward movements over a period (typically 14). The result is normalized to a 0-100 scale. Higher values indicate stronger bullish momentum, lower values indicate stronger bearish momentum.
When It Works Best
- Range-bound/sideways markets
- Finding potential reversal points
- Confirming trend strength
- Spotting divergences (price makes new high, RSI doesn't)
- Markets with clear support and resistance levels
When It Fails
- Strong trending markets (stays overbought/oversold for extended periods)
- During news events and high volatility
- When used in isolation without other confirmation
- Low timeframes with lots of noise
- Markets with low liquidity
Common Beginner Mistakes
- 1Selling every time RSI hits 70 (in uptrends, it can stay above 70 for weeks)
- 2Buying every time RSI hits 30 (in downtrends, it can stay oversold)
- 3Ignoring the overall trend direction
- 4Using default settings without adjusting for the asset/timeframe
- 5Not waiting for confirmation (RSI turning from overbought isn't a sell signal by itself)
Pro Tips
- Use RSI divergence for high-probability setups
- In uptrends, look for RSI to bounce from 40-50 (not 30)
- In downtrends, look for RSI to reverse from 50-60 (not 70)
- Combine with price action at key support/resistance levels
- Use longer periods (21) for less noise, shorter (7) for faster signals
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