The RSI is an indicator; its full form is Relative Strength Index. It was developed by J. Welles Wilder.
RSI is known as a momentum oscillator, which can be used for measuring the speed and change of price movements in the market.
This RSI indicator oscillates between 0 to 100. Commonly, the RSI is considered overbought when it trades above the 70 Band, we can call it oversold when it is traded below the 30 Band.
RSI always generates special Signals to look for divergences between price and this indicator, as well as failure swings.
This Relative Strength Index indicator is also used to identify the general trend in any Forex, Stock, or Crypto Market.
What is overbought in RSI?
Suppose the market is in an uptrend and making new higher highs and higher lows. At this stage, we see in the RSI indicator, the price is trading above the 70 band.
This is a strong bullish trend.
See the following picture:-
You can see in the picture, when first Overbought situation happened. After some retracement, the market continued its bullish trend.
When again Overbought happened, market gave some retracement to the sell side and again moved to the upside to continue its bullish trend. It means When Overbought situation we see in RSI Indicator, we have to catch the buy trades after the market completes a retracement.
It does not mean that we should start selling now, but it is the initial indication that prices can be reversed after some time.
I have observed personally by using this RSI indicator that it shows 2 to 3 times overbought signals before reversing to the opposite side.
When you are looking that approximately 3 times you saw the overbought situation in your indicator window. Then we have to wait for prices to come below the 70 and make any Regular Bearish Divergence.
When we see the prices now trading below the 70 band, then we can plan our sell trade.
What is oversold in RSI?
When market is in downtrend and is making new lower lows and lower lows. Then we can check in the RSI indicator window that price is trading below the 30 band.
This is a strong bearish trend.
See the following picture:-
You can see in the picture when the first Oversold situation happened. After some retracement, the market continued its bearish trend.
When again Oversold happened, the market gave some retracement to the buy side and again moved to the sell side to continue its bearish trend. It means when Oversold situation we see in RSI Indicator, we have to catch the sell trades after the market completes a retracement.
Now we should not start buying here, but we have to wait the prices come above the 30 band.
To trade below the 30 band is a early indication that prices can be reversed from this level.
According to my observation about the RSI, it shows approximately 3 times an oversold situation before reversing to the upside.
Now let’s see when to take a buy trade, when we see the prices are trading less the 30 level, then we should plan to buy.
But before taking any buy or sell trade, we have to see other confluences, like engulfing candles, hammer, inverted hammers, head & shoulder patterns etc.
What are bands in RSI?
Bands are the important levels in the RSI indicator, which indicate to us to follow the trend according to the price movement at that time.
Means different bands tell their own story.
There are three most important bands.
1. 70 Band
2. 50 Band
3. 30 Band
When the market is in uptrend, that means RSI may show us above the 70 band, it means it is a strong bullish trend. But the trend can be changed or retraced anytime.
When the market is trading between 70 and 50, we can say it also a bullish trend but it may not be considered a strong bullish trend.
We can see consolidation during these band levels.
Any time it can be converted from a bullish to a bearish trend. There are so many other hints to be converted from bullish to bearish trend that will be discussed later on.
When the market is in a downtrend, that means RSI may show us below the 30 band. We can consider it a strong bearish trend.
Here, the trend can also be changed from bearish to bullish.
When the prices are shown between 50 and 30, that is also a bearish trend, and we can see a consolidation during these band levels.
See the picture below of RSI Bands.
Some examples of RSI Divergence
Now I am going to show you some Bullish and Bearish divergence examples with pictures, that how it worked perfectly and gave good profitable trades in the Gold – XAUUSD market.
See the following picture:-
You can also check the information there about the RSI Indicator.
I hope you have understood about this RSI Indicator well. You must practice well on the demo account before taking any trades on your real account.
