One of the most interesting phenomena I encounter when using RSI in technical analysis is understanding what negative divergence is. Most traders overlook this, but this concept is truly important.

RSI is fundamentally a momentum indicator that moves between 0 and 100. When it drops below 30, it signals oversold conditions; when it rises above 70, it indicates overbought conditions. But there is a critical point here: price and RSI do not always move in the same direction.

When asked what negative divergence is, the simplest explanation is this: the price makes a new high, but RSI remains at a lower level. In other words, the price is rising, but the indicator is not confirming it. This situation is often a preliminary warning that the price may soon decline. Positive divergence, on the other hand, is the opposite — the price makes a new low, but RSI stays at high levels, indicating a potential upward move.

An important thing: these divergences are not reliable buy or sell signals on their own. They don’t always work in the market. It’s necessary to use them together with other tools like MACD, Stochastic, and price patterns. When multiple indicators point in the same direction, you get a more reliable signal.

The advantage of RSI is that it is quick and simple, but it also has limitations. False signals are common in strong trending markets. That’s why it’s always important to look at the bigger picture. Understanding these nuances while learning technical analysis helps you make better decisions.