How to Use Relative Strength Index (RSI) to Identify Overbought and Oversold Conditions

The Relative Strength Index (RSI) is a popular technical indicator used in technical analysis to identify overbought and oversold conditions in the market. The RSI is a momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset.

The RSI is calculated using the following formula:

RSI = 100 — (100 / (1 + (Average of Upward Price Changes / Average of Downward Price Changes)))

The RSI ranges from 0 to 100, with an RSI reading above 70 indicating an overbought condition and an RSI reading below 30 indicating an oversold condition.

To use the RSI to identify overbought and oversold conditions, you can simply plot the RSI indicator on a chart of the asset you are analyzing. Typically, traders will look for RSI readings above 70 as a potential sell signal and RSI readings below 30 as a potential buy signal.

It’s worth noting that RSI is a lagging indicator, meaning that it tends to confirm trends rather than predict them. Therefore, it’s best to use in combination with other indicators and chart patterns. Also, keep in mind that RSI alone cannot predict or guarantee any future market performance, it should be used in conjunction with other technical analysis methods.