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The traders who use the Relative Strength Index (RSI) to analyze the market conditions commit significant mistakes that often lead to incorrect decision-making and missed opportunities. The most common among them is the overreliance on RSI overbought or oversold levels as the only factors without taking into account the overall market situation. The RSI is normally considered overbought at the level above 70 and oversold below 30, but these numbers do not in all occasions imply that the market trend will change. In the case of a quite strong trend, the RSI could be overbought or oversold for quite a long time, therefore misleading traders so that they will expect a price change too soon. Another common error is to disregard divergences between the RSI and the price action. The RSI divergence is when the price forms higher or lower levels while the RSI moves in the opposite direction, signifying the loss of momentum, but a lot of traders do not manage to notice or act on it properly. Technicians frequently think of the RSI just as a stand-alone indicator, thus they fail to see the significance of mixing it with other technical tools and chart patterns and thereby increasing their forecast accuracy. The RSI is a very powerful tool, but it does not stand alone and is most effective for trend analysis and other indicators. The excess use of the RSI by trading is a danger as traders may impulsively react to minor RSI movements without considering the overall market trend. The last mistake is to be negligent of current news and events thus market signals through RSI can be erroneous. Traders may disregard the underlying factors that are able to change the technical standpoint quite drastically and thus make a tentative decision based only on RSI that can be easily mistaken
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have found the hard way that depending only on RSI signals is a rookie error. Sometimes the market simply remains strong and continues to move forward, even when the RSI crosses overbought or oversold zones. I used to miss out on price and RSI divergences, which are excellent indicators of changes in momentum. These days, I always use RSI in conjunction with other tools and monitor the broader picture, which includes the news of the day. Pursuing RSI signals at the expense of fundamentals? Yes, that is a surefire way to end up frustrated and making poor trades. I've come to appreciate RSI, but I never put my complete trust in it.
I have used the RSI indicator in the past. The Relative Strength Index (RSI) is one of the widely used momentum oscillators in technical analysis, but it comes with several disadvantages. The most significant disadvantage is the tendency of the RSI to produce false signals particularly in a volatile or trending market. Traders may end up over-reacting to the overbought or oversold situation and enter or exit the market prematurely. Moreover, the RSI is typically a lagging indicator of price changes and thus it may give users decision-making delays. Besides that, it is unaccounted for the fundamental aspects that may influence price action in certain market conditions that limit its effectiveness. In addition to that, concentrating on the RSI only may result in a narrow range of trading strategies because the traders may miss the other indicators or the methods of the analysis, which are important for a more rounded view of the market's dynamics.
When it comes to using the RSI, the most common “strategy” that comes associated with it is selling at over-bought zones and buying at over-sold zones,
But if you blindly sell when it is above 70 and buy when it is below 30, you will find yourself on the losing end more often, so why does it happen?, is RSI garbage then?
Not exactly, RSI is an indicator, it indicates stuff about the price, it is never meant to be the basis of your strategy but merely to act as an additional confirmation.
The first thing you need to understand about using any of the momentum oscillators is that there is no such thing as over-bought in an uptrend
The very definition of an uptrend is that higher highs and higher lows keep forming, so RSI being above 70 is not an indication of the instrument being over-bought, it just tells us that the uptrend is still intact, now if in a strong uptrend, RSI drops below 30, that is certainly a point of interest.
