Understanding RSI: Overbought or Bullish Momentum?

Introduction

The Relative Strength Index (RSI) is a popular technical analysis tool used by traders to identify overbought and oversold conditions in the market. It measures the strength and speed of a price movement and provides insights into the potential direction of an asset.

Misconception about RSI

One common misconception about RSI is that a reading above 70 indicates overbought conditions and a bearish reversal. However, this is not always the case. According to technical analysis textbooks, an RSI reading above 70, especially on longer duration charts, actually suggests strong bullish momentum and the possibility of further price appreciation.

Bullish Momentum

When the RSI remains above 70 for an extended period, it indicates that buyers are in control and the asset is likely to continue its upward trend. This was observed in 2019 and 2020, where assets with RSI readings above 70 continued to rally for weeks.

Conclusion

It is important to understand the true significance of RSI in technical analysis. While a reading above 70 may be seen as overbought by some, it actually indicates strong bullish momentum and the potential for further price appreciation. Traders should consider the overall market conditions and other technical indicators before making any trading decisions based on RSI readings.