The Relative Strength Index (RSI) is a popular momentum oscillator used in technical analysis to identify overbought or oversold conditions in the market. The RSI is measured on a scale from 0 to 100,
A common mistake most traders will make is to assume that once RSI signals an overbought/oversold condition, the price should drop/rise, hence leading to a sell/buy decision.
In the 2 examples highlighted (solid blue lines), you will notice that although RSI signaled an overbought/oversold condition, the price continued to climb/drop despite being overbought/oversold.
Remember: Prices can be overbought/oversold for an extended period of time
When using any indicator, always remind yourself of what it is measuring and remember that it is just math (not magic). The indicator is supposed to help quantify and help you see things clearer on the chart (rather than numbers).
Check out Part 2 for Tips on Adjusting the RSI
- RSI values above 70 are often considered overbought, suggesting that the price may be due for a reversal or pullback.
- RSI values below 30 are often considered oversold, indicating that the price may be due for a bounce or recovery.
A common mistake most traders will make is to assume that once RSI signals an overbought/oversold condition, the price should drop/rise, hence leading to a sell/buy decision.
In the 2 examples highlighted (solid blue lines), you will notice that although RSI signaled an overbought/oversold condition, the price continued to climb/drop despite being overbought/oversold.
Remember: Prices can be overbought/oversold for an extended period of time
When using any indicator, always remind yourself of what it is measuring and remember that it is just math (not magic). The indicator is supposed to help quantify and help you see things clearer on the chart (rather than numbers).
Check out Part 2 for Tips on Adjusting the RSI
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