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RELATIVE STRENGTH INDEX

Relative strength index (RSI) is a momentum indicator that indicates overbought or oversold situations of an asset or cryptocurrency. Simply put, RSI is an oscillator that calculates high and low bands between two opposite values, while estimating the magnitude of price variation and the speed of these variations. 

Due to the volatility of the stock and crypto markets, technical indicators provide a guide to plotting entry and exit points. Hence, RSI is a reliable indicator for crypto traders. 

To find out more about the market’s sensitivity, some traders take it a notch higher by using Stochastic RSI. It is a technical indicator built through the combination of a stochastic oscillator formula and RSI, and ranges from 0 to 100. Want to know the best part? Read on to find out more. 

RSI is commonly used to identify general market trends. The most elementary way of using the index is buying when an asset or cryptocurrency is oversold, and selling when it’s overbought. 

Generally, an asset is overbought when the RSI value is 70% or above, and oversold when the value is 30% or below. 

When an asset is overbought, it’s a clear signal of a looming downtrend. On the flip side, oversold security is a sign of an incoming upward trend. In this case, the weakness of the asset is running out of steam and it’s gathering momentum to climb higher. 

RSI is the source of diverse trend trading strategies. One other common trading strategy is buying or selling when RSI hits the midline or crosses it. This depicts the start of a new trend. 

When the RSI is above 50, a bullish trend is brewing. When it’s below 50, it’s the start of a bearish trend. 

While using the midline cross-trading strategy, traders frequently use the ratios of 70/30, 50/50 or 60/40 as resistance and support in bullish or bearish trends. 

When the resistance suffers a hit, a trend reversal may occur. Hence, traders should spring to action accordingly.

What is RSI Divergence?

In addition to its basic use, RSI divergence presents an arguably better market indication. Buying and selling on divergence offers you more assurance and a lower chance of reading signals incorrectly. 

An RSI divergence reveals that the oscillator doesn’t agree with the present price movement. It points out the bearish and bullish positions. 

A bullish divergence signal shows a lower low price action on the market chart and a contrasting higher low on RSI. This means the crypto asset is gaining momentum for an upward push. But for some reason, this isn’t apparent in the price movement yet. 

On the other hand, a bearish divergence occurs when the chart is on a higher low while RSI is on a higher high. It’s a pointer to an upcoming price pullback.

What Does RSI Indicate?

An asset’s primary trend ensures an indicator’s signals are accurately read. RSI indicates the point where crypto hits a bullish trend and the bearish trend begins. As opposed to the general knowledge that 70/30 shows overbought and oversold assets, Constance “Connie” Brown, a market analyst, promotes a different position.

According to him, the oversold signal in an uptrend is most likely over 30% and the overbought signal is often above 70%. Hence, on a downward trend, RSI can be near 50% instead of the conventional 70%. For an improved identification of extremes, most traders engage horizontal trend lines.

However, one obvious way to avoid false RSI signals is via trading signals that correlate with the trend —for instance, using a bearish signal for an asset in a bearish trend, and a bullish signal for an asset in a bullish trend.

Quick Guide to Interpreting RSI

To highlight, once the RSI is above 30, it is an indication of a bullish trade signal. If it drops below 70, it’s a bearish signal. 

So when a crypto RSI rallies above 70, it’s overbought and is most likely getting ready for a trend reversal. An RSI value of 30 or below shows an oversold signal. 

In an uptrend, the RSI stays above 30 and frequently peaks to 70. In contrast to downtrends, RSI indicators go below 30 but never exceed 70. This simple guide helps to identify a trend’s strength and to note upcoming reversals. 

For instance, if the RSI indicator fails to touch 70 during various price swings on an uptrend, yet drops below 30, the trend is weak and might retract lower. 

On the other side of the spectrum, a downtrend is quite different. If it fails to fall to 30, or shoots above 70, the trend is weak. Therefore, it can retract upside. 

Time Period

The default time frame for RSI is 14 periods. This is because a myriad of traders (especially swing traders) find this time frame suitable. But most day traders often find it desirable to adjust for a more sensitive oscillator. 

Short-term day traders prefer periods between 9–11

Long-term traders usually set periods from 20 –30

https://learn.bybit.com/trading/what-is-rsi-and-how-do-you-apply-it-to-crypto-trading/

Key Takeaways

A quick rally to the upside tends to occur after a severe price drop, known as an "oversold bounce." Using the RSI to time trade entries during an oversold bounce is one of the most effective ways to make a profit on the intra-day time frames.

Don't wait for the RSI to reach 0 or 100 - it almost never happens. Values over 85 or below 15 represent extreme overbought/sold conditions.

A divergence occurs when the RSI moves in the opposite direction of the price. A bullish divergence occurs when the RSI makes a higher low while price sets a lower low. This is generally a strong indication that a price bounce is coming. A bearish divergence occurs when the RSI sets a lower high while price sets a higher high and suggests the buying momentum is nearing its climax.

https://cointelegraph.com/news/here-s-3-ways-the-relative-strength-index-rsi-can-be-used-as-a-sell-signal

Bearish divergences

The RSI is a momentum oscillator, thus, when price rises, so should the RSI. However, at times the RSI diverges from the price action. In situations like these, even when the price moves up, the RSI fails to do so.

This phenomenon is called negative or bearish divergence. This is a warning sign that the bullish momentum may be weakening.

The above chart is a good example of a negative divergence, which resulted in a massive fall. The RSI made a high above 89 as Bitcoin rose to a new all-time high at $41,950 on Jan. 8. However, as Bitcoin continued to make higher highs, the RSI continued to make lower highs. This was a sign that the bullish momentum was waning.

When a negative divergence forms, traders should become cautious and wait for the price to react downward before selling. In this case, the breakdown below the 50-day simple moving average or the break below the 45 level on the RSI was a sign that the trend may have run its course.

The Relative Strength Index (RSI) is one of the most powerful indicators across all markets, and the cryptocurrency market is no exception. It is a very simple indicator which makes it an ideal place to start learning technical analysis.

How to understand the RSI signals

The market provides an overbought signal when the RSI line crosses the 70 and an oversold signal when the RSI line crosses 30.

Overbought = Sell signal
Oversold = Buy signal

There is an extra layer to this interpretation however. A trader can also use the indicators 80/20 or even 85/15 instead of the traditional 70/30. This gives a far stronger signal, since it is very rare that the market can maintain it’s current momentum by the time the RSI indicator is signalling above 80 or below 20.

Working this way you can see that in the chart above there have been two strong sell signals and one medium buy signal issued by the RSI indicator since October 2017.



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