A momentum indicator that shows whether the security is overbought or oversold.
The RSI ranges from 0 to 100, a value above 70 indicates overvalued and a value below 30 signals undervalued.
A quick introduction
The Relative Strength Index (RSI) is one of the most commonly used technical indicators to trade securities. First introduced back in 1978 by J. Welles Wilder Jr., the momentum indicator is intended to provide signals about market conditions, such as bullish or bearish price momentum within a time period (14 period is the most common). The calculation of the RSI is somewhat complex, but you can easily plot it on your chart using charting tools like TradingView.
What does it tell us?
The RSI works best when a trend is forming because it’s plotted as a line (oscillator) that relates the number and size of positive closes to the number and size of negative closes. So, if the market is bullish, the RSI will increase because the recent closing prices are higher and greater than the short-term dips or negative closes.
In other words, if bullish pressure is strong, the RSI will cross above the 70-threshold as more participants push the price higher. The key takeaway is that the momentum indicator rises as the size and number of positive closes increase, and decreases as the size and number of negative closes increase.
Think of it this way, if bulls continue to push bitcoin up, investors will eventually begin to reap some profits and bullish momentum becomes fragile since the king is overvalued or overbought (RSI > 70).