I've been in the markets for a while, and a question that constantly comes up among new traders is what is RSI and why do so many people use it. Turns out, this indicator is practically a legend in technical analysis, and for a good reason.

Basically, technical analysis is about looking at what happened before to try to predict what comes next. In crypto as well as traditional markets, almost all serious traders rely on specialized tools and indicators to find patterns and anticipate price movements. The Relative Strength Index, or RSI, one of the most popular indicators, was created in the late 70s by J. Welles Wilder, a mechanical engineer who decided to focus on technical trading after working in real estate. Wilder transferred his earnings from real estate ventures into the stock market and became obsessed with finding reliable tools to identify profitable patterns. In 1978, he compiled all his research into formulas and indicators, with RSI being one of the most important he developed.

So, how does it actually work? RSI measures price changes over 14 periods (14 days on daily charts, 14 hours on hourly charts, etc.). The formula divides the average gain by the average loss over that period and places it on a scale from 0 to 100. It’s basically a momentum oscillator that shows you the speed and magnitude of price movements.

When momentum rises, it indicates active buying. When it falls, traders are losing interest. Interestingly, RSI also helps you detect overbought or oversold conditions. If RSI is at 30 or below, the asset is probably near the bottom. If it’s above 70, it’s likely at the top and may fall. Of course, these are default settings, but you can modify them according to your trading style — a 7-day RSI is more sensitive than a 21-day one.

There’s something more advanced that many traders use: divergences. A bullish divergence occurs when the price drops but RSI rises — suggesting that momentum is strengthening despite the decline. The opposite is a bearish divergence, where the price rises but RSI falls, indicating weakening strength. The problem is that these divergences don’t work well in very strong trends — they work better in sideways markets or with subtle movements.

Here’s the important part: no indicator is 100% effective, especially if you use it alone. RSI is a powerful tool, but you should always combine it with other indicators to avoid false signals. It’s like anything in trading — there’s no silver bullet; you need a comprehensive strategy.