Why is RSI Important?
1. Momentum Assessment: The RSI is a momentum indicator that calculates the pace at which prices move as well as the degree of change of these movements. It delivers traders and investors with clarity about how the price moves, letting them know whether the trend is still stronger or not.
2. Overbought and Oversold Conditions: RSI helps sense market extremes and find areas where the prices are overstretched to one side or the other. Most readings over 70 characterize that an asset is overbought, which implies that its price will probably be due for a correction or reversal. Yet, if the reading of 30 and below indicates that the price is overly sold, then this suggests that the price may be undervalued and may be ready for a rebound.
3. Trend Confirmation: RSI supports the existing trend and sometimes also initiates a new trend with relevant signals. Thus, for instance, if an asset is in an uptrend and the RSI often is above 50, it implies that there exists a positive buying pressure, and in turn, the bullish tendency worsens. On the contrary, if RSI consistently stays beneath 50 rates while declining, it serves as a confirmation of selling pressure and further contributes to the trend of gaining value.
4. Potential Reversal Signals: Usually, RSI provides early indications that are accompanied by price reversals. Relationships between RSI and price action, as well as overbought and oversold readings, can hint the positive trend may get eroded and hence turn negative.
5. Risk Management: The RSI concept of trader management is in revealing prospects in the trade period when they can enter into or exit the trade. The trader can protect his capital by using “do not buy top” or “do not sell bottom” rules to prevent him from entering at poor prices which he might suffer some losses.