What is the RSI indicator?

The Relative Strength Index (RSI) is key in technical analysis. It predicts market trends. It examines historical movements. This momentum oscillator was created by J. Welles Wilder in the 70s. It is now fundamental in both traditional markets and crypto.

Wilder was a mechanical engineer. He started in real estate. Then he sold his properties for R$ 100,000.00 in 1972. That's how he got into the stock market. He created several analytical tools. The RSI shines among them.

How does the RSI indicator work?

The RSI measures price changes. It considers a period (normally 14). Its formula calculates gains against losses. Everything on a scale from 0 to 100.

Evaluate speed and magnitude. Increasing momentum means active purchases. If it drops, interest cools.

As an oscillator, it shows extreme states:

• 30 or less: it seems to be oversold
• Above 70: possibly overbought

Traders adjust those 14 periods. Fewer periods mean more sensitivity. More periods mean less reaction. A 7-day RSI jumps with every change. A 21-day is calmer. Some use levels 20 and 80. Fewer false alarms that way.

RSI Divergences

Divergences are something fascinating. They reveal possible changes:

• Bullish divergence: prices are falling but RSI is rising. Sign that something could change soon.

• Bearish divergence: prices rising while RSI is falling. Not everything is as nice as it seems.

Be careful, they are not perfect. In strong trends they can be misleading. A bullish divergence may appear too early in brutal drops. They work better in calmer markets.

How to use the RSI?

When trading with RSI, several elements need to be taken into account. Its settings matter. The levels do too. Divergences are useful.

No indicator is magical on its own. There is no crystal ball. Experienced traders mix RSI with other tools. They filter out false signals this way. They look for confirmations. It's like putting together a puzzle of the market.