RSI is a technical momentum indicator that measures the magnitude and velocity of price movements. It helps us to spot oversold(undervalued) and oversold(overvalued) conditions in the recent price of a particular coin. by measuring the RSI level we might be able to detect trend reversal and correction points in price.
The relative strength index range lies between 0 and 100. Technically when the RSI number is above 70 it is considered to be in an overbought zone. Conversely, when it is below 30, it's in the oversold zone.
Here is BTC daily chart with the relative strength index indicator. Please pay attention to the RSI-generated signals. It generated a sell signal (trend reversal or correction) when it crossed above 70 and entered into overbought territory. we can see in the above chart that Bitcoin price dropped by more than 50% from 69000 to around 33000(Red circle on the chart- Please click on the image for full screen). On the other hand, When RSI crosses below 30, it means BTC is oversold and might be a trend reversal point and can be a good buying opportunity. (Shown with a green circle on the chart)
Technically RSI below 30 levels can bring opportunities for investors and RSI above 70 can be a good point to sell and secure profit. however, there is no magic RSI number in trading and traders should be cautious using the RSI indicator.
Buying and selling pressure can be measured with RSI as well, We want to buy when selling pressure is released and buying pressure is getting stronger. This is exactly where RSI crossed below 30(selling pressure has weakened) and buy when RSI crosses above the 30 levels (buying pressure is getting stronger).
when the relative strength index number is above 50, we can say bulls are in control and when is below 50 bears are in control.
The RSI number should be picked based on your trading strategy and market phases(Uptrend, sideway, downtrend).
All RSI values here are calculated with the daily closing price.
The relative strength index provides many false signals. Any trading decision should not rely solely on RSI. It is best practice to use this indicator along with other indicators and trading decision metrics.
Even while it is simple to locate a system that has been successful in the past, there is no assurance that it will continue to do so.
If you want to learn more about RSI, please watch the below video.