Relative Strength Index, or RSI, is a well-liked technical indicator for gauging the force and velocity of price movement in financial assets. Here are a few fundamental RSI use steps:
Recognise the RSI's structure. RSI is frequently shown as an oscillator with a 0–100 range. The asset is seen as more oversold if the RSI value is near 0, and more overbought if it is close to 100.
Determine if an asset is overbought or oversold: Typically, an RSI number above 70 suggests an asset is overbought, while a value below 30 indicates an asset is oversold. It's crucial to remember that depending on the market being studied and the time frame employed, the particular numbers used to detect overbought and oversold positions may change.
Divergences happen when the RSI value shifts in the opposite direction of the price movement. Look for them. For instance, a bearish divergence is seen when the price is making higher highs while the RSI is making lower highs. This might portend a future trend reversal.
Confirm a trend using the RSI: The RSI may be used to determine the strength of a trend. The strength and potential continuation of an uptrend can be indicated by the RSI maintaining a continuous level above 50 while the price is in an uptrend. On the other hand, if the price is moving down and the RSI is maintaining a steady level below 50, this may be a sign that the downtrend is solid and likely to last.
Combine RSI with other technical indicators to validate probable trend shifts or trade indications. RSI is frequently used in combination with other technical indicators, such as moving averages. It's crucial to remember that the RSI is only one trading tool in a trader's arsenal and shouldn't be employed on its own. When making trading selections, traders should also take other technical and fundamental aspects into account.