Relative Strength Index (RSI): How to Read It
The Relative Strength Index measures the speed and size of recent gains versus losses on a scale from 0 to 100. It helps spot when a market may be stretched too far in one direction.
The formula
Common settings: 14 periods, with 70 and 30 levels
How to read it
- Readings above 70 are traditionally considered overbought.
- Readings below 30 are traditionally considered oversold.
- The 50 line acts as a dividing line between bullish and bearish momentum.
- In strong uptrends RSI can stay above 70 for long periods.
- Divergence between RSI and price can hint at weakening momentum.
Typical signals
- RSI rising back above 30 after being oversold.
- RSI falling back below 70 after being overbought.
- Bullish divergence: price makes a lower low while RSI makes a higher low.
- Bearish divergence: price makes a higher high while RSI makes a lower high.
- RSI crossing above or below 50 as a momentum shift.
Pitfalls to avoid
- Overbought does not mean price must fall, and oversold does not mean it must rise.
- Divergences can persist for a long time before price turns.
- Very short periods create many noisy signals.
Strategies that use it
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What does RSI 70 mean?
It means recent gains have been strong relative to losses. It is a warning of stretched momentum, not a sell signal by itself.
Can RSI work for crypto?
Yes, though crypto trends can keep RSI at extreme levels for extended periods.
What is RSI divergence?
It is when price and RSI move in opposite directions, suggesting the current move may be losing strength.
Works well with
Simple Moving Average
The Simple Moving Average adds up the last N closing prices and divides by N to create a smooth line. It filters out daily noise so the underlying direction of the trend is easier to see.
🔀Moving Average Convergence Divergence
MACD tracks the gap between a fast and slow EMA to reveal changes in trend momentum. A signal line and histogram make it easier to see when momentum is building or fading.
🎯Bollinger Bands
Bollinger Bands place bands a set number of standard deviations above and below a moving average. The bands widen when volatility rises and narrow when markets get quiet.