What is the RSI indicator?

RSI is a technical indicator that helps investors detect overbought or oversold conditions in the market.

RSI stands for Relative Strength Index - relative strength index. The RSI calculates the ratio between the average price increase and decrease over a given period, representing the overbought and oversold conditions of the market.

RSI is an indicator in technical analysis, which can be applied to many types of assets such as stocks, cryptocurrencies, commodities, ... This indicator was born in 1978 by Mr. J. Welles Wilder.

The time to calculate the RSI fluctuation usually takes the number 14, for example 14 days if viewed on a daily chart, 14 hours if viewed on an hourly chart.

What is the RSI indicator?

The value of the RSI is represented on a scale from 0 to 100. Where, if the RSI is greater than 70, it theoretically means the stock is overbought. This also warns the uptrend is likely to be reversed.

Conversely, if the RSI is less than 30, it means the stock is oversold, indicating that the stock price may be nearing a bottom and preparing to turn up.

Between 30 and 70 is considered a neutral zone, with 50 being a sign of no trend.

To be more sure of the signals, traders can adjust the RSI to set 20 and 80 as oversold and overbought levels instead of 30 and 70.

Besides showing oversold or overbought conditions, traders can also use RSI divergence to predict trend reversals or identify support and resistance levels.

Divergence occurs when a security's price moves in the opposite direction of a technical indicator. This warns the current price trend may be weakening and the risk of a change in price direction. There are two types of divergence, negative divergence and positive divergence.

- Positive divergence: Rising RSI makes a high low while falling prices create a low low, warning of strong bullish momentum despite the downtrend.

- Negative divergence: RSI falls and makes low highs while asset prices rise to create higher highs, warning that prices may drop sharply.

As with all technical indicators, RSI also has limitations in its analysis. In volatile or sideways markets, the RSI can give false signals. In some cases, RSI continuously remained in the oversold or overbought zone for a long time.

In addition, RSI only measures the change of price and not other factors such as trading volume. Investors should consider combining with other technical indicators to limit risks.