Learning technical skills is a endless process. One of the most commonly used tool for technical analysis is RSI(Relative Strength Index). In this blog we learn about it and it’s wrong assumptions.
RSI (Relative Strength Index) is a momentum oscillator that measures the speed and magnitude of recent price changes to evaluate overbought or oversold conditions in a market. It was developed by J. Welles Wilder and ranges from 0 to 100.
How RSI Works
Interpretation:
- Above 70 → Overbought (potential for a pullback or reversal)
- Below 30 → Oversold (potential for a bounce or reversal)
- Between 30–70 → Neutral or trending
Divergence:
- Bullish Divergence → Price makes a new low, but RSI makes a higher low (possible upward reversal)
- Bearish Divergence → Price makes a new high, but RSI makes a lower high (possible downward reversal)
Midline (50) Cross:
- RSI > 50 → Bullish momentum
- RSI < 50 → Bearish momentum
How to Use RSI Effectively
Trend Confirmation:
- RSI > 70 in an uptrend can mean strength, not necessarily overbought.
- RSI < 30 in a downtrend can signal strong bearish momentum.
Overbought/Oversold Strategy:
- Buy when RSI moves from below 30 to above 30.
- Sell when RSI moves from above 70 to below 70.
Divergences:
- Bullish divergence → Potential to buy.
- Bearish divergence → Potential to sell or short.
Failure Swings:
- Bullish failure swing = RSI crosses 30, makes a higher low, then breaks above the previous high → Buy signal
- Bearish failure swing = RSI crosses 70, makes a lower high, then breaks below the previous low → Sell signal
Common Wrong Assumptions and Mistakes
“Overbought = Sell Immediately, Oversold = Buy Immediately”
- RSI can stay overbought/oversold for a long time during strong trends.
- Overbought in an uptrend can signal strength, not weakness.
Ignoring the Trend:
- RSI signals are more reliable when they align with the larger trend.
- Example: RSI > 70 in a strong uptrend = trend continuation, not necessarily a reversal.
Relying on RSI Alone:
- Combine RSI with other indicators (e.g., moving averages, volume, support/resistance) for confirmation.
Using the Same Settings for All Assets/Timeframes:
- Shorter periods (e.g., 7) → More sensitive, more signals (useful for short-term trading).
- Longer periods (e.g., 21) → Smoother, fewer signals (better for long-term positions).
🚀 Pro Tip:
- RSI works best in range-bound markets.
- In strong trending markets, consider adjusting the overbought/oversold levels to 80/20 instead of 70/30.
- Combine RSI with MACD or moving averages for stronger signals.
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