Ever wonder if a stock or crypto has gone too high, too fast—or if it might be due for a bounce? That’s exactly where the Relative Strength Index (RSI) comes in. It’s one of the most popular tools among traders for a reason: it helps you spot potential turning points in the market with just one number. And yes—it’s easier to understand than it sounds.
What is RSI, anyway?
RSI is a momentum indicator that measures the strength of recent price movements. It gives you a number between 0 and 100 that helps you figure out if an asset is overbought (possibly due for a pullback) or oversold (maybe ready to bounce).
Here’s the general idea:
- Above 70 = Overbought → price may be stretched, time to be cautious
- Below 30 = Oversold → price may be beaten down, potential for a reversal
- Between 30–70 = Neutral zone
Keep in mind: RSI doesn’t tell you what will happen. It gives you a sense of when a move might be getting tired.
How to calculate RSI (in simple terms)
Don’t worry—most charting platforms calculate RSI for you automatically. But here’s the basic idea:
RSI compares the average gains and average losses over a set period, usually 14 periods (days, hours, etc.).
The formula looks like this (simplified):
RSI = 100 – [100 / (1 + RS)]Where RS = Average Gain / Average Loss over the last 14 periods
If the price has mostly gone up, RSI will be high. If it’s mostly gone down, RSI will be low.
How traders use RSI
RSI can be used in a few ways:
- Identify reversals: If RSI is above 70, some traders look to take profits or tighten stops. If it’s below 30, others watch for signs of a bottom.
- Confirm trends: RSI rising with price = strong momentum. If price is rising but RSI is falling, that could be a red flag (called bearish divergence).
- Spot divergences: When RSI and price move in opposite directions, it may hint at a possible reversal.
Pro tip: RSI works even better when you combine it with other tools like moving averages or support/resistance levels.
Final thoughts
RSI is a great tool for beginners because it’s visual, intuitive, and quick to read. It helps you avoid chasing hype at the top or panic-selling at the bottom. Just remember: no indicator is perfect. RSI is a guide, not a guarantee—so always pair it with smart risk management and a bit of patience.
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