I've been watching traders obsessed with indicators for years, but there's one that really works if you use it correctly: the RSI. And it's not because it's magical, but because it captures something that the price alone doesn't show you.

The RSI, or Relative Strength Index, basically measures whether the market is overbought or oversold. It compares bullish closes against bearish closes over a certain period and normalizes everything on a scale from 0 to 100. The good thing is that it smooths out the price noise and gives you a fixed band to work with, making things easier.

When the RSI rises above 70, technically the asset is overbought. When it drops below 30, it's oversold. But here’s the trick: that doesn’t mean the price will reverse immediately. I’ve seen assets stay overbought for months if investors keep buying. The RSI gives you a necessary condition, but you need to validate it with trend analysis. Without that, you'll be trading false signals constantly.

Let’s look at what happened with Tesla between 2019 and 2022. In May 2019, the RSI entered oversold territory. You expected a rebound, and it indeed happened. But what was interesting was how the indicator behaved afterward. It reached overbought in February 2020 during the COVID chaos, but it never broke the previous uptrend. That told you it was a correction, not a change in direction. Then the RSI reached overbought again several times between 2020 and 2021, always retreating without falling too much. That confirmed the trend remained strong.

What changed in October 2021 was different. The RSI reached overbought, but then it didn’t return to that zone. Meanwhile, the price started making lower highs. That divergence was the signal that something was breaking. In December, the uptrend broke and the RSI fell into oversold territory. From that point, as long as the indicator fluctuated between oversold and its mid-zone, the price would keep falling.

Now, there’s something many people ignore: the middle level of the RSI, which is at 50. That invisible number is critical. When the RSI oscillates between 50 and 70, prices tend to go up. When it oscillates between 50 and 30, they tend to go down. If the indicator crosses below 50 in an uptrend, that’s a correction, but as long as it doesn’t stay there, the trend remains alive.

The most reliable signals with RSI come from divergences. Imagine the price makes lower lows, but the RSI makes higher lows. That means selling pressure is weakening and a rebound is likely. It happened with Broadcom: the price was falling, but the RSI showed that selling was losing strength. Then came the bullish reversal.

The opposite also works. When the price makes higher highs but the RSI makes lower highs, the market is losing momentum. That’s what happened with Disney: everything seemed to continue upward, but the RSI warned that something was wrong. Months later, the price plummeted.

If you want stronger signals, combine RSI with another indicator. MACD works well for this. Wait for the RSI to reach an extreme zone, then confirm with MACD crossing its midline. That gives you both the necessary and sufficient condition to enter. With Block Inc., for example, the RSI was in overbought territory and then the MACD confirmed a decline. That was enough to confidently open a short position.

What I’ve learned is that RSI isn’t a magic tool. It’s just another piece of the puzzle. The important thing is to use it to confirm what the chart is already telling you. If you see a trend break and RSI validates it, you have a good probability. If you see divergences between price and indicator, pay attention because that often anticipates changes.

In the end, RSI is useful because it helps you avoid getting trapped in extreme moves. It tells you when the market is stretched and when it has fuel to continue. But always remember: it’s just an indicator. Trend analysis remains king.