RSI Relative Strength Index Crypto Trading Guide

The principle of the RSI indicator

RSI calculates the relative strength (RS) by dividing the average gain over a specified period (e.g., 14 days) by the average loss, and then applies the formula RSI = 100 - [100 / (1 + RS)] to produce a value between 0 and 100. This design transforms price momentum into an intuitive signal, helping traders identify overbought or oversold market conditions and avoid blindly chasing prices.

Market Signal Interpretation

RSI above 70 indicates overbought conditions, which may trigger a pullback, suitable for reducing holdings and waiting; below 30 is a signal of oversold conditions, increasing the likelihood of a rebound, and can be considered for positioning at lower points. The 50 line separates bullish and bearish trends, with above 50 indicating a dominant buying pressure, while below 50 shows prevailing selling pressure, suitable for confirming the current market direction.

Encryption Application Practical Training

In highly volatile assets such as Bitcoin, RSI is often used in conjunction with volume or MACD to enhance the accuracy of divergence signals. For example, when the price makes a new low but RSI forms a higher low, this is a bullish divergence, indicating a reversal opportunity. This indicator is particularly suitable for short-term swing trading to capture quick corrections.

Advantages and Precautions

RSI is simple to operate and reacts quickly, making it widely applicable for analyzing altcoins. However, it may deviate from the threshold for a long time under strong trends, creating false signals. It is recommended to adjust the period (for example, a short-term 9-day period is more sensitive) and avoid using it alone; combine it with support and resistance levels to enhance reliability.