The Price Momentum Indicator is a essential technical tool that investors employ to identify potential overextended or undervalued market conditions. Formulated by technical analyst J. Welles Wilder in the late 70s, the RSI measures the velocity and amplitude of price movements on a normalized 100-point scale. While the standard calculation uses a 14-day window, traders can modify this period to suit their timeframe.

When the RSI exceeds 70, it is typically interpreted as indicating an overextended state. This suggests the asset may have rallied too rapidly, increasing the likelihood of a price reversal. Many traders view this as a potential signal to take profits. On the flip side, when the RSI drops below 30, it is commonly seen as undervalued, implying the asset may have been pressed down excessively, and could be primed for a rebound. In such cases, traders may initiate long positions.

Note that RSI values outside the 30–70 range do not ensure a price reversal. In powerful uptrends, the RSI can stay in overbought territory for weeks. For instance, during a sustained uptrend, آرش وداد the RSI may consistently hover above 70 as bullish momentum continues unabated. Likewise, in a intense downtrend, the RSI can stay entrenched below 30 as selling pressure dominates. Relying exclusively on these thresholds can produce false signals.

To enhance the reliability of RSI signals, most professionals combine them with supplementary forms of analysis. This may involve assessing chart structure, mapping key horizontal levels, evaluating EMAs, or reviewing change in trading volume. RSI-price divergences are also powerful indicators. For example, if price is making higher highs while the RSI is creating lower peaks, it may signal diminishing bullish strength.

Traders should also consider the broader market context. RSI signals tend to be most actionable in consolidating markets where prices move back and forth between clear trading channels. In trending environments, it is often wiser to follow the prevailing trend and use RSI to fine-tune entries rather than to seek contrarian signals.

Finally, it is essential to validate any RSI-based strategy using historical charts. Multiple markets — whether stocks — behave differently across periods, and a successful approach for one may yield poor results with another. Discipline, position sizing, and trading plan adherence are vital to using RSI effectively.

In summary, the RSI is a useful tool for recognizing overbought and oversold conditions, but it should never be used alone. Integrating it with fundamental analysis and understanding the broader trend enables traders to avoid common mistakes.