The Relative Strength Index (RSI) stands as a widely recognized technical indicator among traders, measuring the magnitude and change rate of recent price movements. It is instrumental in detecting when an asset under consideration, like a cryptocurrency, stock, or commodity, is overbought or oversold. The rating of RSI is shown as a number within the interval from 0 to 100 and is generally determined based on the last 14 periods (minutes, hours, days, etc., according to one’s chart).
The rise of RSI past the 70 mark is often considered a signal to traders that the asset might be overbought through the rapid upsurge of the price followed by a pullback. In contrast, when the RSI threshold drops under 30, the asset is considered to be oversold, which means that the price hasn’t been able to hold itself and the price may bounce back up. The said levels do not provide certainties and instead are the tools that help traders have a better sense of market momentum and possible ups and downs.
Besides that, RSI is employed for the purpose of locating divergence, which is a situation where the price and the RSI are moving in two opposite directions. In such a case, the trader might get a signal very early about the trend that is gaining or losing strength.
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Simply put, the RSI is an instrument that traders rely on to eliminate the noise by indicating the market’s predominant pressure i.e., either buying or selling, and also whether the trend is stretched or about to change.