What Is RSI?
RSI, the relative strength index, compresses recent momentum into a 0-100 score: how strong have gains been relative to losses over the window, 14 periods by default. Above 70 gets called overbought, below 30 oversold, and both labels mislead exactly when they matter most. It is the indicator most quoted by people who have not read its fine print.
How It Actually Works
- Fast gains push RSI high, fast losses push it low, and sideways chop parks it near 50. It is a speedometer for momentum, not a valuation and not a ceiling.
- The folklore works best in ranges: in sideways markets, fading 70 and buying 30 has a real edge, mean reversion measured. In trends it inverts: strong markets ride RSI above 70 for weeks while "overbought" sellers get run over. Overbought means moving fast, and fast is what trends do.
- Divergences are the grown-up use: price making new highs while RSI makes lower highs flags thinning momentum, a yellow light worth combining with volume and structure at levels. A warning, not a trigger.
Risks and Common Mistakes
- Shorting strength because a number crossed 70: the graveyard trade of every crypto bull leg. Counter-trend bets need more than an oscillator's opinion.
- Treating RSI as independent evidence alongside MAs and candle patterns: all are the same closes, re-cooked. One crowd, several thermometers.
- Timeframe cherry-picking: some window's RSI always agrees with what you already wanted to do. Decide the timeframe before consulting the number.
When It Matters
Range trading, divergence-watching at extremes, and translating "Bitcoin is overbought" headlines into their actual content: it went up quickly. The discipline that decides whether any indicator helps lives on my Trading page.
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