I. Market Thermometer: The Core Essence of RSI

When the stock price keeps hitting new highs, are you worried about chasing the high and getting stuck? When the coin price plummets, how should you judge the timing for bottom-fishing? In the toolbox of technical analysis, the Relative Strength Index (RSI) is like an accurate market thermometer, helping you identify the critical points of 'overbought and oversold' by quantifying the strength of price fluctuations.

Established by technical analysis master Welles Wilder in 1978, RSI essentially judges whether market sentiment is overheated or overcooled by comparing the intensity of price increases and decreases over a period. Its values are anchored in the range of 0-100, with the classic parameter being 14 periods, forming three core signal zones:

- 70+ Overbought Area: Excessive consumption of upward momentum, increased risk of correction;

- 30-70 Neutral Zone: Balance of bullish and bearish forces, high probability of trend continuation;

- 30-Oversold Area: Downward momentum weakening, likelihood of a rebound increasing.

II. Breaking Down the Calculation Formula: Unveiling the Mathematical Logic of RSI

Understanding the calculation logic of RSI can help you interpret signals more accurately. Taking a 14-day cycle as an example, the calculation steps are as follows:

1. Daily Change Classification: Record the difference between the daily closing price and the previous day's price, with increases marked as positive (+) and decreases as negative (-);

2. Average Gain and Loss Calculation:

- Average Gain (U) = Arithmetic mean of all gains over 14 days;

- Average Loss (D) = Arithmetic mean of the absolute values of all losses over 14 days;

3. Relative Strength (RS) = U / D;

4. RSI Value = 100 - [100 / (1 + RS)].

Practical Case: Assuming the 5-day price fluctuations of gold are as follows:

Date Closing Price Change Percentage

1 1860 -

2 1865 +5

3 1863 -2

4 1872 +9

5 1868 -4

Calculate the average gain over the past 3 days: U=(5+9)/3≈4.67, average loss: D=(2+4)/3≈2, RS=4.67/2≈2.33, RSI=100-100/(1+2.33)≈70.09, at this time it is close to the overbought threshold, beware of a pullback.

III. Parameter Strategy: How to Adjust Your Trading Radar

The core parameter of RSI is the period (default 14 days), but different trading scenarios require flexible adjustments:

- Short-term Trading (Minute Level): Shortened to 6-9 periods to capture intraday fluctuations, but beware of false signals;

- Medium to Long-term Trading: Extended to 21-28 periods to filter out short-term noise and focus on trend reversals;

- High Volatility Market (such as cryptocurrencies): The overbought and oversold thresholds can be adjusted to 80/20 to avoid dullness interference.

Key Reminder: Parameter adjustments need to be verified with backtesting. For example, in trending markets in the oil market, a 21-period RSI combined with a 60-day moving average is more effective than the default parameters; while in the A-share choppy market, the winning rate of a 9-period RSI with MACD golden cross resonance is higher.

IV. Four-Dimensional Trading Strategy: A Practical Guide from Signals to Execution

1. Overbought and Oversold Reversal Strategy

- Buy Signal: RSI crosses above 30 from below 30, and the price breaks through the short-term moving average (such as the 5-day line);

- Sell Signal: RSI crosses below 70 from above 70, and trading volume increases (confirming selling pressure).

Case: The Dow Jones Index rebounded after RSI fell below 30 in October 2023, combined with the price breaking through the 20-day moving average, starting a 3-month upward trend.

2. Cycle Crossover Strategy

- Death Cross: 6-day RSI crosses below 12-day RSI, short-term momentum weakens, suitable for going short;

- Golden Cross: 6-day RSI crosses above 12-day RSI, short-term momentum strengthens, suitable for going long.

Tip: Crossover signals need to be verified with trading volume - when the golden cross occurs with increased volume, the validity of the upward movement is higher.

3. Divergence Trading Method: The Secret Weapon for Predicting Trend Reversals

- Top Divergence (Sell Signal): Price makes a new high, but RSI does not make a new high, indicating weakening upward momentum;

- Bottom Divergence (Buy Signal): Price makes a new low, but RSI does not make a new low, indicating weakening downward momentum.

Practical Case: In 2024, Bitcoin showed three instances of bottom divergence near $16,000, subsequently starting a doubling trend.

4. Multi-Indicator Resonance Strategy

- Combined with MACD: RSI overbought + MACD death cross, double confirmation for selling;

- Combined with Bollinger Bands: When RSI is oversold and the price touches the lower band, the probability of a rebound increases;

- Combined with Trading Volume: RSI bottom divergence + increasing volume, confirming reversal signals.

V. Pitfall Guide: Three Major Misuses of RSI

1. Dullness Trap: In a one-sided bull market, RSI may remain above 70 for a long time (such as in 2021 with US tech stocks), blindly shorting at this time will miss the main rising wave; counter-strategy: Combine with trend indicators (such as ADX) to judge whether it is a strong trend.

2. Reliance on Single Signal: Trading solely based on RSI overbought and oversold gives a win rate of less than 50%; optimization plan: at least pair with 1-2 trend indicators (such as MA, BOLL) to form resonance.

3. Parameter Fixation: Different varieties have different applicable cycles - Large-cap stocks in the US are suitable for a 14-period, while speculative stocks need to use a 9-period; suggestion: Through historical data backtesting, find the 'golden parameter' exclusive to the variety.

VI. Advanced Thinking: Differentiated Applications of RSI in Different Markets

- Stock Market: Combine with industry prosperity; when a golden cross appears in the RSI oversold zone, prioritize selecting targets with northbound capital inflow.

- Forex Market: The effectiveness of RSI and KDJ resonance signals improves around the release of non-farm data;

- Futures Market: In the peak demand season for commodity futures, RSI overbought may signal a continuation of the trend, which needs to be judged in conjunction with inventory data.

The value of RSI lies not in mechanically applying the numbers, but in understanding the market sentiment logic behind it. When you can skillfully combine RSI's overbought, oversold, divergence, and crossover signals with trend cycles and capital flows, it will become your tool for capturing turning points and avoiding risks. Remember: there are no perfect indicators, only traders who understand how to combine and use them.