Warning on risks: Financial contracts for difference are complex instruments and are associated with a high risk of rapid financial losses due to leverage. On 72.29% of retail investor accounts, financial losses occur when trading financial contracts for difference with this provider. You should consider whether you understand how financial contracts for difference work, and whether you can afford to take the high risk of suffering financial losses. Please read the Risk Disclosures.
.svg)
.svg)
.svg)
RSI
The Relative Strength Index, abbreviated as RSI, is one of the most popular technical indicators among traders. It belongs to the so-called oscillators, which means its value moves within a precisely defined range – from 0 to 100. Its main purpose is to show whether a given asset is currently overbought or oversold, thus giving the trader an indication of the potential next price movement.
.svg)
The Basic Principle
RSI is based on the ratio of average gains to average losses over a certain time period, most often 14 days. The result is then displayed as a number on a scale from 0 to 100. If the value exceeds 70, the market is considered overbought – this may suggest an upcoming correction or even a trend reversal. Conversely, if RSI falls below 30, the asset is considered oversold, which may indicate an opportunity for future growth.
How Traders Use RSI
The simplest use is to watch when RSI enters the zones above 70 or below 30. In practice, this means a trader may consider selling when the market is overbought and buying when it is oversold. Another possibility is monitoring divergences – situations where the price of the asset continues to rise but RSI is already falling, or vice versa. Divergence often points to a weakening trend and may be a precursor to its reversal.
Limits and Suitable Use
RSI is a useful tool, but ultimately it should not be viewed in isolation. In strong trends the indicator can remain in overbought or oversold zones for a long time, thereby giving false signals. That is why it is advisable to combine it with other methods of technical analysis, such as moving averages or candlestick pattern analysis. This way the trader gains a more complete picture of the market situation.
Conclusion
The RSI oscillator is a simple yet effective indicator that helps traders assess whether an asset is temporarily “too expensive” or “too cheap.” Correct use can improve the timing of trade entries and exits, but it should always be part of a broader risk management strategy rather than the sole decision-making factor.