The relative strength index (RSI) is a momentum oscillator that has become a popular technical indicator among traders. Developed in the late 1970s by the legendary trader, J. Welles Wilder, the RSI is intended to provide traders with signals about the relative strength of bullish and bearish price momentum in an underlying asset.

The RSI is a finite, bounded oscillator taking values between 0 and 100. Typically, a reading above 70 is said to reflect an overbought market and a reading below 30 an oversold market. These positive and negative extremes represent extreme levels of relative strength and can potentially signal a turn in the market. The RSI is sometimes said to foretell trend reversals, a statement which may have some merit as the movements in the RSI line may sometimes precede movements in the underlying asset.

That said, there are important conditions that traders need to be aware of before interpreting any signals generated by the RSI. First, the RSI works best in relatively low volatility – trading ranges rather than trending markets. In strong trending markets, the RSI may remain above 70 or below 30 for an extended period of time, leading some traders to believe that the underlying asset is still overbought or oversold.

Secondly, the cross of the RSI line above or below the overbought/oversold threshold levels is only an indication of a potential reversal in the current market conditions – it is not an indication of the direction of the underlying asset’s price. A cross above 70 could be an indication of a long entry, but it could also be an indication of a long exit.

Traders may therefore use the RSI as a tool to identify potential reversals in a particular asset but should be aware of the conditions in which the RSI works best, and the different interpretations which can be placed on an RSI cross.