RSI explained, and where it fails

What RSI actually measures

RSI compares the size of recent gains to the size of recent losses over a lookback period, usually fourteen candles, and expresses the result on a scale from zero to one hundred. That is the whole idea.

It is a momentum reading. It tells you how one-sided recent movement has been. It does not tell you where price is going, where the trend is, or whether a level matters.

The oversold trap

The common reading is that below thirty means oversold and above seventy means overbought, so you buy the first and sell the second. In a range that works often enough to feel like a system. In a trend it is a way to lose money repeatedly.

In a strong downtrend RSI can sit under thirty for days. Every one of those days looks like a buy signal to someone reading the number in isolation, and every one of them is a knife to catch. The indicator is not broken. It is telling you the truth, which is that selling has been overwhelmingly one-sided. That is a description of a downtrend, not a reason to buy it.

Divergence, and why it is better than the levels

The more useful reading is divergence. Price makes a lower low, RSI makes a higher low. The new low happened with less force behind it than the last one. Something is running out of energy.

Divergence is still not an entry. Markets can diverge for a long time before anything happens, and a divergence that fails often precedes the sharpest continuation. What it gives you is a reason to pay attention, which is the correct use of a momentum tool.

What RSI cannot see

• Where the trend is. It has no concept of direction beyond the lookback window.
• Whether price is at a level that has mattered before.
• Whether the swing it is measuring is still structurally valid.
• What is happening on any other timeframe.

Where Signicator fits

Signicator uses RSI for the one thing it is good at: judging whether a push has force behind it or is fading. That reading is one vote among five, scored on a closed candle alongside trend, structure and geometry.

An oversold reading on its own will never print a signal. An oversold reading that coincides with a valid retracement zone, inside a channel, with the trend structure intact, might. That is the difference between using RSI and obeying it.