What Does Crypto Relative Strength Index Mean?

Technical analysis is the study of patterns in charts, trade volume, and Japanese candlesticks, among other things. Using technical indicators like the MACD, Stochastic, Bollinger Bands, and the Relative Strength Index is another crucial part of putting together successful technical trading strategies.

How Does the Relative Strength Index (RSI) Work?

The RSI evaluates the speed of price movement by comparing how strong an asset is when its price goes up to how strong it is when its price goes down. The result is shown as a line graph inside an indication with a scale from 0 to 100.

Using the RSI, a value of over 70 means that the price has gone up too far, while a score below 30 means that the price has gone down too far. The reading shows how strong the momentum is driving the pace of change in the price of that asset. The higher or lower the reading, the stronger the momentum. But it can also be a turning point in a trend that has been going on for a while, when the trend loses its strength because it has been bought or sold too much.

RSI Formula: How Does the RSI Indicator Work?

How to figure out the RSI indicator is:

RS = average gain / average loss

RSI = 100 – 100 / (1 + RS)

Where:

RS stands for “relative strength.”

Relative Strength Index (RSI)

The RSI indicator looks at how much a cryptocurrency’s price has gone up or down over a certain period of time. When trading bitcoin, stocks, forex, commodities, or other assets, the RSI is most often set to 14 periods. The first calculation gives the data, and the second calculation in the formula smooths the results to make the RSI indicator.

How to Set RSI for Trading Crypto

Like a lot of other technical indicators, the RSI indicator can be changed to function better with cryptocurrency. For example, more advanced trading methods suggest altering the limits so that trade signals are generated at 80 and 20, which is more accurate and has less risk.

Some versions of the RSI indicator come with an RSI-based moving average that may be turned on or off. The moving average is a simple moving average (SMA) with 14 periods, just as the RSI. Crypto traders can also change the duration of the moving average period to obtain more dependable trading signals.

How to read RSI charts and figure out what RSI signals mean

With some practice and getting to know the tool, it will become easy to read RSI crypto price charts.

The RSI is a momentum indicator that follows trends. It can assist traders confirm trends that are getting stronger, identify future trend reversals, and measure the momentum of buying or selling during an uptrend or downturn.

Based on how the tool is made, readings above 70 mean that prices have gone up too far and that a downturn and possibly a reversal are likely. During a negative trend, readings below 30 show that the market is oversold, and a rally or reversal could happen.

In addition to readings of 70 and 30, some trading systems include a horizontal trendline at a reading of 50. If the price goes through this line, it means that price momentum is getting stronger. Trendlines can also be created across the peaks and valleys of the RSI. When they pass through these points, more aggressive traders might use this as a sign to buy or sell.

The more extreme the RSI score, the more likely it is that the trend will change. But strong crypto movements can go too far, and the RSI might stay overbought or oversold for a long time. Because of this, misleading signals are possible, and the RSI works better in trading ranges than in markets that are moving in one direction.

RSI vs Bollinger Bands

The Bollinger Bands are an upper and lower band made from a 20-period SMA that is set to two standard deviations. When prices are trading at the top or bottom of the band, they are overpriced or underpriced, accordingly.

Signals work better when linked with the RSI, which alerts a trader when the market has been overbought or oversold. A trader can detect that a trend is getting stronger when the price goes through the mid-BB and the RSI goes through 50.