What is the Relative Strength Index (RSI)?
The relative strength index (RSI) is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to evaluate overbought and oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator and can have a reading from 0 to 100.
Traditional usage of the RISI is that values of 70 or above indicate that an asset is becoming overbought or overvalued and may be primed for a trend reversal or pullback. On the other hand, an RSI reading of 30 or below indicates the asset or security is oversold or undervalued in price.
Example of Relative Strength Index (RSI)
Looking at the 2D time frame of BTC (Bitcoin) we can see that during the dump of early 2020 that the RSI dipped below 30, indicating that the price of the asset was oversold and a reversal is on the way. As the price of Bitcoin continued to rise, the RSI index topped 70 a few times and is currently hovering above that area. Now that it’s been over 70 for some time, traders can expect that a sell off will take place soon to reset the index back to 30 before moving higher.
How to Trade based off the RSI
Many traders use the 30-70 rule for trading the Relative Strength Index (RSI). Traders know that the price of the asset is oversold at or underneath 30 and will scoop up the asset or security at a discounted rate. On the other hand, traders know that when the RSI has a reading of 70 or higher, they’ll start to look for prices to exit and sell off the asset or security before the dump really starts taking form.