The relative strength index (RSI) is a momentum indicator that indicates whether an asset or cryptocurrency is overbought or oversold. Simply explained, RSI is an oscillator that calculates high and low bands between two opposite values while estimating the magnitude and speed of price variations.
Because of the volatility of the stock and crypto markets, technical indicators serve as a reference for plotting entry and exit points. As a result, RSI is considered by some to be a reliable indicator for crypto traders.
What RSI is used for?
The RSI is frequently used to determine general market trends. Buying when cryptocurrency is oversold and selling when it is overbought is the most elementary approach to use the index.
In general, an asset is overbought when the RSI value is 70 or higher and oversold when the value is 30 or below.
When an asset becomes overbought, it is a strong indication of a looming downtrend. On the other hand, oversold security is an indication of an impending uptrend. In this situation, the asset's weakness is running out of steam, and it is gathering momentum to climb higher.
The RSI is the source of diverse trend trading strategies. Another typical trading strategy is to purchase or sell when the RSI reaches or crosses the midline. This shows the start of a new trend. When the RSI rises over 50, a bullish trend is on the horizon. When it falls below 50, it signals the start of a bearish trend.
Traders that employ the midline cross-trading strategy frequently use the 70/30, 50/50, or 60/40 ratios as resistance and support in bullish or bearish trends. A trend reversal may occur if the resistance is breached. As a result, traders must take action accordingly.
What Does RSI Indicate?
The RSI indicates when a crypto asset is overbought in a bullish trend and when its oversold in a bearish trend. In a bullish trend, the RSI of an oversold asset is usually equal to or greater than 30, while the RSI of an overbought asset is typically equal to or greater than 70. During a bearish trend, RSI might be below 50 instead of the conventional 70 and vice versa. Most traders use horizontal trend lines at 30-50-70 to help them identify extremes.
One possible strategy to prevent misleading RSI signals is to use trading signals such as moving averages, divergences, and convergences that correlate with the trend rather than relying on RSI alone. Let’s take a look at RSI divergence and how one can we use it to spot a trade opportunity.
What is RSI Divergence?
RSI divergence can be a more reliable indicator than RSI alone. Buying and selling based on divergence provides greater assurance and reduces the possibility of misreading a signal.
An RSI divergence occurs when the price chart and the RSI indicator indicate movement in opposite directions.
A “Bullish Divergence” occurs when the price chart is making lower lows while the RSI indicator makes higher lows. It may indicate an upcoming bullish reversal.
A “Bearish Divergence” occurs when the price chart is making higher highs while the RSI indicator makes a lower high. It indicates the slowing down of a bullish trend and consequently a bearish reversal.
Below is an example of bearish divergence on BTCUSD.