RSI Relative Strength Index: 8 Key Points Analysis and Practical Guidance

In the toolkit of technical analysis in financial markets, the Relative Strength Index (RSI) is undoubtedly a "evergreen" method for measuring price momentum and assessing market sentiment. With its concise numerical range and clear signal logic, it reveals the market's overbought and oversold conditions, as well as signs of trend reversals for investors. This article will start from the basic definition of RSI and distill 8 core points to help everyone fully grasp the practical essence of this indicator.
1. RSI Indicator: Establishing Basic Understanding

RSI, or Relative Strength Index, is primarily used to measure the momentum of price fluctuations, helping investors determine whether the current market is in an overbought or oversold zone. Its value range is strictly limited between 0 and 100, and regardless of the market's drastic price fluctuations, RSI will not exceed this range. It is important to note that when there is a divergence between the price of the asset and the direction of the RSI indicator, it often serves as a significant warning signal that the market trend is about to change. This "divergence" is known as RSI divergence, which can be further categorized into two main types: trend reversal divergence and trend continuation divergence. The following sections will elaborate on these key points.
2. 8 Key Core Points: Unlocking the Practical Secrets of RSI

Mastering the core points of RSI is the key to moving from "understanding the indicators" to "making good use of the indicators." The following 8 points cover core dimensions such as numerical interpretation of the indicators, signal judgment, parameter adjustment, and risk avoidance, and should be flexibly applied in practical scenarios.
Key Point 1: To address the passivation challenge, two major adjustment strategies have shown effectiveness.

After the RSI enters the overbought or oversold zone, a "dulling" phenomenon often occurs—where the indicator remains in the extreme range for a long time without showing a trend reversal, which can easily mislead investor decisions. There are two practical strategies to address this issue: first, adjust the threshold of the extreme range by moving the traditional overbought zone (above 80) up to above 90, and the oversold zone (below 20) down to below 10, thereby narrowing the extreme range and reducing the dulling interference; second, increase the value of the indicator parameter N (N is the calculation period of RSI, usually defaulting to 14), to reduce the impact of short-term fluctuations by extending the calculation period, making extreme signals more valuable for reference.
Key Point 2: Critical value boundaries that define market strength, weakness, and opportunities.

In the value system of RSI, there are three key points to remember: 50 is the "dividing line" between a strong market and a weak market. When RSI runs above 50 for a long time, the overall market presents a strong pattern; when it runs below 50 for a long time, it indicates a weak pattern. 80 and 20 are the traditional dividing lines for overbought and oversold conditions—when RSI reaches 80 or above, it indicates that the buying power in the market is overstretched, and the opportunity for subsequent pullback adjustments significantly increases, necessitating caution about high-level risks; when RSI drops to 20 or below, selling pressure is fully released, and the market is highly likely to enter an oversold state, making the opportunity for a rebound gradually more prominent.
Key Point 3: Rely on trend lines to capture buy and sell signals

The trend line analysis of RSI is an important means of determining the continuation and reversal of trends. It can be divided into two scenarios: when RSI moves up from below, the multiple troughs it forms will create an "ascending support line". This line serves as a "safety cushion" for the short-term trend. If RSI breaks below this support line, it indicates a depletion of short-term upward momentum, which is a clear sell signal; conversely, when RSI moves down from above, the multiple peaks it forms will create a "descending resistance line". If RSI breaks upward through this resistance line, it suggests a weakening of downward momentum, and a new upward trend may begin, which is a reliable buy signal.
Key Point 4: Pairing fast and slow lines to distinguish direction with golden and death crosses.

The parameter N value of RSI varies, resulting in differences in the "fast and slow lines": when the N value is larger (e.g., 24), the indicator reacts slowly, forming a "slow line" that filters out short-term fluctuations and reflects long-term trends; when the N value is smaller (e.g., 6), the indicator reacts sensitively, forming a "fast line" that can capture short-term trend changes but is easily disturbed by noise. Using the fast and slow lines together can generate clear signals through "golden crosses" and "death crosses": when the fast line crosses above the slow line, it forms a "golden cross", indicating that short-term momentum is stronger than long-term momentum, which is a buy signal; when the fast line crosses below the slow line, it forms a "death cross", indicating that short-term momentum is weaker than long-term momentum, which is a sell signal.
Key Point 5: Trend Reversal Signal, Simple and Direct to Grasp

This is the most basic and intuitive signal of RSI: when the RSI indicator clearly turns downward during an upward trend (for example, falling from 85 to 70 and the trend continues), it indicates that the upward momentum has disappeared, and the market may turn downward, so one should sell decisively; when the RSI clearly turns upward during a downward trend (for example, rising from 15 to 30 and the trend continues), it indicates that the downward momentum has been exhausted, and the probability of a rebound increases significantly, so one may consider buying. It should be noted that this signal should be judged in conjunction with the range in which the indicator is located; if it turns downward in the overbought zone, the validity of the signal is higher; similarly, if it turns upward in the oversold zone.
Key Point 6: Divergence Phenomenon, the "Early Warning Indicator" of Trend Reversal

The "divergence" between RSI and the price of a cryptocurrency is a core signal in technical analysis and a strong warning of an impending trend reversal. It is specifically divided into two types: first, "top divergence"—when the price reaches a new high, but RSI does not reach a new high and instead shows a downward trend, indicating that the price increase lacks momentum support, signifying a potential top reversal; second, "bottom divergence"—when the price reaches a new low, but RSI does not reach a new low and instead forms an upward trend, indicating that the price decline has lost momentum, signifying a potential bottom reversal. Additionally, in some cases, a "trend continuation divergence" may occur, which needs to be judged in conjunction with the overall trend to avoid misjudgment.
Key Point 7: The 50-point boundary crossing confirms trend reversal.

The previous text mentioned that 50 is the dividing line between strong and weak markets, and the "crossing" signal of the RSI at the 50 line is key to confirming trend reversals: when the RSI crosses up from below 50 to above 50, it indicates that the market has shifted from weak to strong, marking a fundamental change in the trend and serving as a reliable buy signal; when the RSI crosses down from above 50 to below 50, it indicates that the market has shifted from strong to weak, signaling the beginning of a trend reversal and serving as a clear sell signal. This signal should be validated with other indicators such as volume to enhance signal effectiveness.
Point 8: Beware of phishing risks, use long-term RSI as a "gatekeeper".

RSI, as a short-term indicator, is easily manipulated by large players to create "false signals"—that is, the indicator issues misleading buy and sell signals, enticing investors to follow the trend. The core method to avoid this risk is to combine the long-term RSI for judgment: if the short-term RSI (such as the 6-day RSI) falls below the 50 line, but the long-term RSI (such as the 24-day RSI) remains stable above 50, it indicates that the short-term fluctuations are merely adjustments within a strong trend, and the overall upward trend has not changed, making the short-term sell signal a "false signal"; conversely, if the short-term RSI crosses above the 50 line, but the long-term RSI remains below 50, it is likely a rebound in a weak trend, making the buy signal unreliable.
3. Conclusion: Core Principles of RSI Usage

The RSI indicator, while simple and practical, is not a "magic key." In practice, two main principles must be kept in mind: first, "do not use it in isolation"; it should be combined with other indicators such as moving averages, trading volume, and candlestick patterns for comprehensive judgment, as the signals from a single indicator often have limitations; second, "adapt flexibly to different scenarios"; the volatility differs across various markets (such as stocks and cryptocurrencies) and different asset types, so parameters and threshold ranges need to be adjusted to avoid rigid application. Mastering the above eight core points and continuously summarizing based on practical experience will enable the RSI to truly become a "valuable assistant" in investment decision-making.