Recently, I've been trying to better understand how the RSI indicator works, and I realized that many traders are mistaken about it. RSI is a momentum indicator that moves between 0 and 100, primarily comparing an asset's recent gains and losses. The 30 and 70 levels are critical points, but there's an important detail here.

Most people use RSI only to identify overbought or oversold conditions, but its true strength lies in divergences. Especially, you need to pay attention to negative divergences because they can be a significant sign that the price will reverse. Negative divergence occurs when the price makes a new high, but the RSI stays below the previous high. This mismatch can indicate that sellers are gaining control and that the price may start to decline.

Conversely, when the price hits a new low while RSI remains high, it’s a positive divergence and can signal a potential upward move. But remember: divergences alone are not enough to make decisions. They should be confirmed with other indicators, support and resistance levels, and overall market conditions. Instead of immediately selling when you see a negative divergence, it’s smarter to wait for confirmation from other signals. That’s how technical analysis works — it’s not just about one indicator, but seeing the full picture to make informed decisions.