Whether you are a seasoned trader, or just learning the ropes, educating yourself about the fundamental concepts of the Relative Strength Indicator (RSI) index is one of the most crucial strategies to learn to become a successful trader. This concept is easy to understand and can be used in several financial markets, including Forex, stocks commodities and cryptocurrency.

One of the most detailed and most widely circulated information, the Relative Strength Indicator is to sell when the RSI reaches 70 (since this supposedly means the currency is overbought at that price), to buy when the RSI hits 30 (because assets are apparently oversold at that price), and that when the RSI reaches 50, this is a good spot to enter the market. All of these are often misunderstood and can be incorrect. Read this guide to apply the concept of RSI in your trading and benefit from the high volatility of the crypto market.

What is RSI Indicator?

RSI is a momentum oscillator created by J Welles Wilder for the commodities market in the late 1970s. But over the years, it has been found to work very well for the Crypto market. RSI is usually used in the 14-day timeframe and measures the velocity and magnitude of the directional price movements as a ratio of the higher closes to the lower closes.

Usually, this RSI indicator is used to identify whether or not an asset is overbought or oversold. Traders employ this by graphically plotting a single line with a value of 0 to 100. And when the market is considered overbought, its RSI measures above 70; conversely, a reading below 30 means the market is oversold.

How does the RSI indicator work?

RSI is also known as the Overbought and Oversold Indicator. When an oversold condition presents itself, the trader will use this data, along with other technical indicators, to determine the best possible martlet entry. Conversely, when the RSI indicates an overbought market. The trader explores the best possible entry point to place a sell order on the specific asset.

You can check the RSI by various time intervals on the charts (i.e. hourly, daily, weekly, 30 minutes, 15 minutes, etc.). Daily and weekly time frames seem to be the ones most traders will analyze and seem to give the most useful and reliable information.

Divergence Trading Using RSI

Divergences are important trend reversal signals that, when combined with other indicators, give high-probability trade setups. RSI is widely used in determining divergence patterns. A divergence pattern forms on the chart when the price action drives in one direction and the indicator moves in the other.

For example, the price action is moving up with the slope ascending, while on the other hand, the RSI is moving down with the slope descending. This pattern is known as a Positive Divergence Pattern or Bullish Divergence Pattern.

It indicates a potential trend reversal from up to down. Similarly, when the price action is sloping down while the RSI indicator is sloping up, this indicates a bearish divergence pattern.

RSI calculation formula

The formula for the RSI calculation is pretty straightforward:

RSI = 100–100 / (1 + RS)

Interpretation:

The RS is the average of total upward price changes divided by the average of total downward price changes across the 14 most recent periods/candles.

Basically, this formula indicates that price fluctuations form the basis of the RSI indicator. RSI, in effect, determines how strong the upswings vs the down movements are in the period in question. The typical RSI period is 14. Also, the RSI settings for crypto are the same as in other markets.

Wrapping Up

Although the Relative Strength Index (RSI) might provide the price behavior of an asset and can help traders validate trends and trend reversals, traders should keep in mind that there is no 100% guarantee that the RSI indicator will work in every situation. Therefore, including more indicators like MACD to confirm your trading decisions is essential.