What is the RSI and how to use it without falling into its trap
The RSI (Relative Strength Index) is an indicator that measures the speed and magnitude of price moves on a 0 to 100 scale, to signal when an asset is "overbought" or "oversold". It's one of the most used in the world and, at the same time, one that loses the most money from being used badly. Here's how to understand it well.
What it measures exactly
The RSI compares the strength of recent rises with that of falls. Above 70 is considered "overbought" (risen a lot and fast); below 30, "oversold" (fallen a lot and fast). The intuitive reading would be: overbought = sell, oversold = buy. And that's exactly the trap.
The trap: overbought doesn't mean "sell"
The classic mistake: seeing the RSI at 75 and selling "because it's overbought". But in a strong uptrend, the RSI can stay overbought for weeks while price keeps rising. Selling just because the RSI is high, mid-trend, is one of the fastest ways to lose money. Overbought means "it's rising strongly", not "it's about to fall".
How to really use it: divergence
The most valuable use of the RSI isn't overbought, it's divergence. It happens when price makes a higher high but the RSI makes a lower one: price rises, but the strength behind it decreases. It's a warning that the trend is weakening. Divergence isn't an entry order, but it is a valuable hint that something is changing under the surface.
Context rules (again)
Like all indicators, the RSI works differently depending on the market. In a sideways range, the 70 and 30 levels do tend to mark reasonable turns. In a strong trend, they're almost useless as turn signals. Before interpreting the RSI, check whether the market is ranging or trending: it completely changes what the indicator is telling you.
The typical mistake: trading the indicator, not the market
The RSI (like any indicator) is a summary of price, not an independent source of truth. Whoever trades looking only at the indicator, without looking at price structure, ends up a slave to a line. Use the RSI as support for a reading you've already made of the chart, not as a substitute for that reading.
Where to start
Add the RSI to your chart but, at first, use it for one thing only: looking for divergences in trends you're already following. Ignore overbought/oversold signals until you clearly tell range from trend. One well-understood indicator is worth more than five misused ones creating noise and false signals.