RSI Crypto Trading Strategy: Definitive Guide


Relative Strength Index (RSI) tells you whether a cryptocurrency or asset is overbought or oversold. The formula helps traders make trade decisions.

In 2021 it was reported that the global cryptocurrency market was worth roughly $1.3 billion. As the cryptocurrency market continues to grow, more people are starting to make trades; the question is, what is an RSI trading strategy and how does it work? 

The crypto world provides a lot of opportunities to get a return on your investments and increase your wealth. One of the best ways to do this is to use a cryptocurrency trading strategy.

If you would like to learn about RSI crypto trading, then keep reading. 

What Is RSI?

The relative Strength Index (RSI) is a momentum indicator that tells you whether or not a cryptocurrency or asset is overbought or oversold. This formula gets used by traders to help them make decisions on their trades.

The RSI also gives traders a technical signal about bullish or bearish price momentum through its formula.

How it looks:

rsi indicator

 

RSI Formula

There is a specific formula that RSI uses which gives traders indications. The formula gets calculated by taking the average of absolute upward price changes and dividing it by the average of the absolute downward price changes.

This gets done across the 14 most recent periods or candles. The formula then reveals whether or not prices are bullish or bearish.

How the Relative Strength Index (RSI) Works

The RSI has a momentum oscillator which is a line graph that oscillates between two extremes. It will read between 0 and 100 to give traders an indication of the current cryptocurrency readings. 

The RSI indicator will examine recent price fluctuations, and it will then give a reading from 0-100. This gives traders an indication as to whether or not the cryptocurrency is overbought or oversold.

overbought rsi

Usually, traders take action at 30 and 70. Oversold means the RSI of the crypto is below 30, and overbought means the RSI of the crypto is above 70. Green means “Buy”, and red means “Sell” signal. In order to get a more comprehensive understanding of cryptocurrency, most traders combine the RSI strategy with other technical indicators like MACD.

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Combining RSI with MACD

btc usdt rsi macd

MACD and RSI are two popular technical indicators that are often used by traders to make decisions about when to enter and exit trades. While each indicator can be used on its own, they can also be used together to provide a more complete picture of market conditions. MACD measures the difference between two moving averages, while RSI measures the level of buying and selling pressure in the market. 

When MACD is combined with RSI, it can help to identify trend reversals and confirm signals from either indicator. For example, if MACD is indicating that a stock is overbought, RSI can be used to confirm this signal. Similarly, if RSI is indicating that a stock is oversold, MACD can be used to confirm this signal. By using these two indicators together, traders can get a better sense of when to enter and exit trades.

What Is RSI Divergence?

RSI divergence is a technical analysis indicator that looks for differences between a crypto’s price action and the action of its relative strength index (RSI). Divergence occurs when the price of crypto diverges from the trend indicated by the RSI. 

There are two main types of divergence: bullish divergence and bearish divergence. A bullish divergence occurs when the crypto’s price action is making new lows, but the RSI is making higher lows. Bearish divergence, on the other hand, occurs when the crypto’s price action is making new highs, but the RSI is making lower highs. 

A trader may use divergence as a signal to enter or exit a trade. However, it is important to note that divergence is not always a reliable indicator, and it should be used in conjunction with other technical indicators.

RSI Divergence

It is possible to have both bullish divergence and bearish divergence on the crypto RSI tracker.

Divergences can be shown in both long time frames and shorter time frames. For example, some divergences can be shown in 15-minute time frames, and some can be shown in 1-hour timeframes.  

Why Is RSI Important in Crypto Markets?

The cryptocurrency market can be unpredictable, and changes can happen quickly. However, traders need to know about changes in the market otherwise, they can be at risk of making bad trades.

The RSI gives traders a more accurate indication of how the market is moving so that they can make better trades. It also gives traders an overall better look at whether or not the market is going to be bearish in the short term or bullish.

Without the RSI, traders may simply not know which trades they should make. 

Best RSI Settings for Crypto

With RSI settings, there are a few different aspects that need to be considered. One aspect is what range of the RSI traders should pay attention to. 

In general, a good RSI setting would be: 

  • 0-30: The market is becoming oversold, so it may be an opportunity to buy.
  • 30-70: The market is neutral and trading sideways. 
  • 70-100: the market is becoming overbought, so it may be a good time to sell.  

Of course, these RSI settings can be changed; however, it’s important to use accurate RSI settings to avoid making bad trades. 

Overbought Versus Oversold

Two common terms in the crypto industry are overbought and oversold. Overbought is whenever a cryptocurrency is trading at a level above its value so a correction is expected.

Oversold is whenever a cryptocurrency is trading below its value, and an upward move may be expected; however, prices can move down further.

On an RSI, an overbought cryptocurrency will be over 70, and an oversold cryptocurrency will be below 30.  

Learn: Day trading crypto

How to Use the RSI Indicator in Crypto Trading?

Traders should use the RSI indicator to provide them with insights into how the market is changing. To do this, traders must look up the cryptocurrency they are trading, then look at the number the RSI indicator is showing. 

For example, if the reading is 70 and it is overbought, then this may be a good time to sell. Alternatively, if it is 30 and it is oversold, it may be a good time to buy. 

Traders should use an accurate RSI indicator that gets updated within at least the previous hour. 

RSI vs. MACD

While the RSI measures the price change of cryptocurrencies, the MACD is slightly different. The MACD measures the relationship between two exponential moving averages (EMA’s).

The MACD also has a different formula from the RSI, and the way that traders use it is slightly different. Because these two indicators measure different factors, there are times when they give conflicting readings.

However, the RSI is viewed by many traders as the more reliable cryptocurrency indicator.

Use the RSI With Other Technical Indicators

Traders can increase their insights into the market by using multiple technical indicators. In general, the RSI works well with other short-term moving average crossovers.

Traders can use the RSI along with both 5 EMAs crossing over with the 10 EMA for indications. The RSI can also work with MACD. However, this can produce false readings at times.  

Limitations of the RSI

One of the limitations of RSI is that price reversals can be unpredictable, and the RSI may not always indicate this. Also, the RSI can give out false signals sometimes, so it is not always 100 percent accurate.

For example, an RSI can show fake-outs which can be misleading.

When trading, it’s important to keep in mind that RSIs have limitations, and traders are also responsible for making their own decisions. 

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Disclaimer

All investment strategies and investments involve risk of loss. Nothing contained in this website should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.
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