Crypto RSI explained: Relative Strength Index (RSI) is in crypto a momentum indicator that measures the magnitude of recent price changes to analyze overbought or oversold conditions.
RSI values range from 0 to 100.
How to calculate RSI Indicator and RSI Divergence?
The relative strength index (RSI) is calculated using the following formula: RSI = 100 – 100 / (1 + RS) Where RS = Average gain of up periods during the specified time frame / Average loss of down periods during the specified time frame asset price is considered overbought (due for a correction) when RSI is above 70, and oversold (due for a rebound) when it is below 30. Some traders use more extreme levels (80/20) to reduce false readings.
In a strong uptrend, RSI will often reach 70 and beyond for sustained periods, and downtrends can stay at 30 or below for a long time. While general overbought and oversold levels can be accurate, they may not provide the most timely signals for trend traders.
RSI Divergence Crypto Trading Strategy example
Trend traders can use RSI in their trading strategy to buy near oversold conditions when the trend is up (i.e. buy the dips – see chart 1 below), and sell short near overbought condition in a downtrend (i.e. sell the rebound). Let’s assume that the long-term trend of an asset is up. A buy signal occurs when the RSI moves below 50 and then back above it. Essentially, this means a pullback in price has occurred, and the trader is buying once the pullback appears to have ended (according to the RSI) and the trend is resuming. The 50 level is used because the RSI doesn’t typically reach 30 in an uptrend unless a potential reversal is underway. A short-trade signal occurs when the trend is down and the RSI moves above 50 and then back below it.
The RSI is often used in conjunction with trendlines, as trendline support or resistance often coincides with support or resistance levels in the RSI reading.
Watching for RSI divergence between price and the RSI indicator is another way to use it in your crypto trading strategy.
Divergence occurs when a cryptocurrency price makes a new high or low in price but the RSI does not make a corresponding new high or low value. A bearish divergence forms when a coin price records a higher high and RSI forms a lower high (see chart 2 above). RSI does not confirm the new high and this shows weakening momentum. Bullish divergence, which is interpreted as a buy signal, occurs when price makes a new low, but the RSI value does not.
RSI divergence signals tend to be more accurate on the longer time frames (min 1-hour charts). You get fewer false signals
Reading RSI Divergence indicator can also be used as a confirmation of a breakout!
Here’s an example of how Bullish RSI Divergence preceded a bullish breakout from Falling Wedge pattern. Together, these two signals create a strong case:
Failure swings can also be strong indications of an upcoming reversal. Failure swings are independent of price action. In other words, failure swings focus solely on RSI for crypto signals and ignore the concept of divergences. A bullish failure swing forms when RSI moves below 30 (oversold), bounces above 30, pulls back, holds above 30 and then breaks its prior high. It is basically a move to oversold levels and then a higher low above oversold levels.
A bearish failure swing forms when RSI moves above 70, pulls back, bounces, fails to exceed 70 and then breaks its prior low. It is basically a move to overbought levels and then a lower high below overbought levels.
Crypto traders on altFINS can easily filter over 1,800 cryptocurrencies to find RSI oversold or overbought situations by checking our Signal Summary page (see below). Alternatively, traders can also build their own custom filter using altFINS Screener. See how to use our Screener here.
FAQs
The RSI is highly effective for day trading forex due to its ability to measure momentum and identify overbought or oversold conditions in currency pairs. Its sensitivity to price changes helps traders capitalize on short-term fluctuations and spot potential entry and exit points in a fast-moving market.
Does RSI divergence really work? ›
Both RSI and MACD (Moving Average Convergence Divergence) can be effective for identifying divergence. However, the choice between the two often boils down to personal preference and trading style. Some traders prefer RSI for its simplicity, while others favor MACD for its ability to capture both trend and momentum.
What is the RSI 30 70 strategy? ›
Buy Signal: Buy when the RSI drops below 30. (It signifies that the stock is potentially oversold, and there may be an upcoming price increase). Sell Signal: Sell when the RSI exceeds 70. (It indicates that the stock is potentially overbought, and price might start decreasing soon).
What is the best RSI setting for divergence? ›
The average RSI setting is 14 periods, with 70 as overbought signals and 30 as oversold signals. A cross above 70 indicates that the ticker is primed for a correction, a pull-back, or a trend reversal. A cross below 30 indicates that the ticker is undervalued.
Can RSI reach $100? ›
1. Overbought and Oversold levels: RSI gives an indication of the impending reversals or reaction in price of a security. RSI moves in the range of 0 and 100.
Do professional traders use RSI? ›
Understanding the RSI
The RSI is a widely used technical indicator and an oscillator that indicates a market is overbought when the RSI value is over 70 and indicates oversold conditions when RSI readings are under 30. Some traders and analysts prefer to use the more extreme readings of 80 and 20.
How to trade RSI like a pro? ›
One RSI trading strategy used in trending markets would be to wait for the indicator to signal an overbought condition during an uptrend. The trader then waits for RSI to drop below 50, which signals a long entry. If the trend remains in place price will typically recover off this level and move to new highs.
Which RSI is most accurate? ›
As mentioned before, the normal default settings for RSI is 14 on technical charts. But experts believe that the best timeframe for RSI actually lies between 2 to 6. Intermediate and expert day traders prefer the latter timeframe as they can decrease or increase the values according to their position.
What is the strongest divergence indicator? ›
The best divergence indicators mt4 are MACD, RSI, stochastic, OA. They are user-friendly and simple but provide quite accurate trading signals. You can learn more about stochastic oscillator trading forex in the article Stochastic Oscillator: guide for using indicator in Forex trading.
What is the 5 RSI strategy? ›
The strategy uses a 5 period simple moving average (SMA) to determine trend and a 5 period relative strength index (RSI) to confirm signals. It outlines the rules for buying - when price closes above the 5 SMA and RSI is above 50, and selling - when price closes below the 5 SMA and RSI is below 50.
The relative strength index (RSI) provides short-term buy and sell signals. Low RSI levels (below 30) generate buy signals. High RSI levels (above 70) generate sell signals. The S&P 500's RSI suggests stocks may be expensive.
What is the best time frame for RSI trading? ›
The default RSI setting of 14 periods is suitable for most traders, especially for swing traders. But some intraday traders use different settings when using the RSI indicator for day trading. They don't like using the 14 setting, because they find that it generates infrequent trading signals.
Is RSI divergence profitable? ›
If used correctly, RSI divergence can be profitable, providing early signals of trend reversals. However, it also carries risks, and traders should use it alongside other indicators and proper risk management strategies.
How accurate is RSI divergence? ›
Spotting divergence on RSI is one of the most powerful functions of this indicator. The reason for this is that a RSI divergence is a more reliable signal than the overbought and oversold indications by themselves. You will constantly get overbought and oversold signals. However, the divergence is a rarer occurrence.
What is the best indicator to work with RSI? ›
RSI is often used to obtain an early sign of possible trend changes. Therefore, adding exponential moving averages (EMAs) that respond more quickly to recent price changes can help. Relatively short-term moving average crossovers, such as the 5 EMA crossing over the 10 EMA, are best suited to complement RSI.
Can you trade using only RSI? ›
However, trading using RSI signals only is not the best approach as it has been designed to be used as a filter and not the main instrument. A technical trading strategy will be more efficient when using a trend indicator or at least paying attention to the Price Action signals.
Is there a better indicator than RSI? ›
RSI and MACD are two valuable instruments for technical traders. The RSI is particularly effective in identifying instances where the market is either overbought or oversold in range-bound conditions. The MACD, on the opther hand, is most useful in trending markets as it highlights changes in momentum and trends.
How reliable is the RSI indicator? ›
Additionally, RSI can remain overbought or oversold for long periods of time. So even if a divergence suggests that a stock might move a certain direction, there's no guarantee.
What is the success rate of RSI? ›
The success rate of the RSI trading strategy is 91%. We have done some extensive backtesting on different RSI trading strategies here. Here is a table with the key data findings. Key data and findings for the RSI Strategy can be found here.
