What is the Relative Strength Index (RSI) for Crypto
The RSI indicator is a momentum indicator mainly used in technical analysis. Its role is to measure the magnitude of price fluctuations in order to evaluate if the price of assets like stocks or crypto is oversold or overbought. J. Welles Wilder Jr. first developed and introduced the indicator in his book “New Concepts in Technical Trading Systems” (1978).
The RSI is displayed like a line graph that moves between two extremes, and its reading is between 0-100. Traditionally, values above 70 signal that an asset is becoming overbought (or overpriced), while those less than 30 suggest that it is oversold (or undervalued).
- Crypto RSI alerts above 70 signal an asset becoming overbought, generating a sell signal.
- Crypto RSI indicator lower than 30 indicates that an asset is becoming oversold, generating a buy signal.
- If an asset is overbought, it means there is a looming downtrend, while the opposite is true if it is oversold.
- RSI crypto also provides divergence, which happens when a cryptocurrency’s price makes a new high or low, while the RSI does not. It can be bearish or bullish.
Crypto RSI and Its Predictions
RSI for crypto can be considered a reliable indicator for crypto traders as it provides a guide to plotting entry and exit points due to the volatility of crypto (or stock) markets. It is often used for identifying general market trends.
In general, once the crypto RSI indicator passes the horizontal 30 levels, it is considered to be a bullish sign (the market will go higher). On the other hand, sliding below the horizontal 70 levels pertains to a bearish trend (the market will get lower).
An asset being overbought is a sign that there is a looming downtrend while being oversold indicates an upward trend. In the latter case, the asset’s weakness is gathering memento to get higher after running out of steam. However, trend reversals also can happen, so traders should take action accordingly.
RSI Numbers and Ranges for Crypto: How to Read RSI Crypto
Once you understand what RSI for crypto is, you can then proceed to the reading. But how to read RSI crypto? The RSI crypto readings may fall into a range or band during trends. When there is an uptrend, the RSI is typically over 30 and frequently hits 70. On the other hand, during a downtrend, it is rare for RSI to exceed 70, and the indicator often hits 30 or lower.
Knowing these rules can help an investor identify potential reversals. For example, if you see that RSI is not reaching 70 on several consecutive price swings while there is an uptrend and falls below 30, this indicates that the trend has become weaker and can be reversing lower.
However, in the case of a downtrend, it is the opposite. If it cannot reach 30 or below and rises above 70, it means that the downtrend has become weaker and could be heading higher. If you use the RSI for crypto in this way, it is also helpful to include trend lines and moving averages.
To sum up, when the RSI value is less than 30, it is usually a signal to purchase a cryptocurrency since it is oversold. However, if the value is more than 70, it means that the asset is overbought, indicating that it should be sold. Aside from the traditional 70/30 model, traders may also use the 80/20 or 85/15 indicators.
Something to note is that RSI can stay in oversold or overbought territory for an extended period (weeks, even months). In other words, if it passes above the 70 or below the 30 thresholds, it is not uncommon for it to stay there without going back to neutral territory.
How to Apply RSI to Crypto?
The general way to use this indicator is to buy or trade a cryptocurrency (or another asset) when it is oversold (value of 30 or less) and sell if it is overbought (value of 70 or above). However, instead of this traditional model (70/30), traders can use the 80/20 or 85/15 indicators. These give much stronger signals because the market can rarely keep its current momentum by the time the RSI signals above 80 or under 20.
Another signal that the RSI provides is “divergence,” which can be bearish or bullish. It happens when the price of a cryptocurrency makes a new high or low, but the RSI does not make a corresponding one. In the case of bearish divergence (strong sell signal), a coin’s price shows a higher high, while the RSI records a lower high.
On the other hand, a bullish divergence (strong buy signal) forms when the price makes a lower low, while the RSI value shows a higher low.
Another suggestion is to view several timeframes (such as 1d, 6h, and 1 hour) to get a better indication of how the price will move in the short, mid, or long periods of time.
The Relative Strength Index (RSI) was initially introduced in 1978 by J. Welles Wilder Jr. It is an indicator used to measure the magnitude of price fluctuations to evaluate if an asset is oversold or overbought. Though you should not trust only one indicator, the RSI is one of the more commonly mentioned and traded indexes in the cryptocurrency market.