What is RSI? Overbought and Oversold Levels
RSI (Relative Strength Index) is a momentum oscillator developed by J. Welles Wilder in 1978. It takes a value between 0 and 100 and indicates whether the market is 'overbought' or 'oversold'.
How is RSI Calculated?
RSI is calculated by dividing average gains by average losses over a specific period. The default period is 14. The result is normalized between 0-100. Let's focus on practical interpretation without going into calculation details.
How is RSI Interpreted?
| RSI Value | Condition | Interpretation |
|---|---|---|
| 70+ | Overbought | Price has risen too much, a correction may come |
| 50-70 | Bullish Zone | Buyers dominate, trend is up |
| 50 | Neutral | Buyer-seller balance |
| 30-50 | Bearish Zone | Sellers dominate, trend is down |
| 30- | Oversold | Price has fallen too much, a reversal may come |
IMPORTANT: Price can rise further when RSI is above 70, and fall further when it is below 30. These levels are 'caution levels', not 'guaranteed reversal points'.
Buy/Sell Signals with RSI
1. Overbought/Oversold Signal
When RSI falls below 30 and then crosses 30 back up, it can be interpreted as a BUY signal. When it rises above 70 and then crosses 70 back down, it can be interpreted as a SELL signal.
2. RSI Divergence
If price makes a new low while RSI makes a higher low (bullish divergence), a buying opportunity may be approaching. If price makes a new high while RSI makes a lower high (bearish divergence), a sell signal may be coming.
3. 50 Level Crossover
When RSI crosses above 50, it means buyers are taking control; when it crosses below, sellers are dominating. It can be used for trend confirmation.
RSI Parameter: Which One Should I Choose?
- RSI(7): Very sensitive, for scalping, many false signals
- RSI(14): Standard, balanced — most widely used
- RSI(21): Fewer signals but more reliable
- RSI(28+): For long-term trend confirmation
Using RSI in Optimo
Optimo automatically optimizes the RSI period, overbought, and oversold levels. Instead of the standard 14/70/30, a different combination like 9/65/35 or 21/75/25 may give much better results for your symbol.
