The oscillating indicator that shows when an asset is in a state of being oversold or overbought is called the Relative Strength Index, or RSI.

By comparing price movement over a particular time (most often 14 periods), you can generate the indicator’s signals. This allows the RSI to illustrate whether the price has become excessively high or low.

This is why it can be used to determine the time of the end of an existing trend or the formation of a new one.

If a trader is trying to find an optimal time to enter or exit the market to maximize profit before the risk of a price drop emerges, then the RSI can be very useful for them.

The indicator consists of a single line that oscillates between the boundaries of 0 and 100, appearing below the price chart. The midline of the chart is the 50 level.

How to Use the 50 Level to Determine Buying Power and Selling Pressure

If an asset is being sought for purchase by more traders than those looking to sell, the price will rise, indicating a shift above 50. Conversely, if more traders are trying to sell the asset than buy, the price will decline, indicating a shift below 50.

How to Use the 30 and 70 Levels to Identify Overbought and Oversold Conditions

Traders take note of when the RSI hits the 30 and 70 levels. These points signal periods of overbought and oversold conditions for the asset.

When the line drops below 30, a downtrend ends.

When the line rises above 70, an uptrend ends.

How to Use RSI for Market Entry

At times when the asset reaches an extreme, you can use the RSI indicator to confirm the possibility of a reversal, and then you can enter the market against the trend.

How to Use RSI for Market Exit

For exiting the market, you can also utilize the RSI indicator when it signals an end to the trend.

Changing RSI Indicator Settings

You have the option to change the RSI indicator settings to make it less or more sensitive to price movement changes.

If you increase the setting, the RSI indicator will become less sensitive and will lead to a reduction in the situations where the asset is identified as being overbought or oversold. Therefore, it will be more difficult to identify shifts in trend direction.

By decreasing the setting, the RSI becomes more sensitive.

Lowering the setting can better identify overbought or oversold conditions, but it will also lead to more false signals.

Many traders do not change the standard setting of 14 as it provides the most accurate and useful information for them.