How to Use and Calculate RSI in Cryptocurrency Trading

What Is RSI?

RSI (Relative Strength Indicator) is a crucial technical indicator in crypto asset trading, widely used to measure both the speed and momentum of price changes. Traders rely on RSI to determine whether an asset is overbought or oversold, making it a powerful tool for market analysis.

Developed by American technical analyst J. Welles Wilder Jr. in 1978, RSI has become a staple in stock, forex, and—more recently—crypto markets.

By integrating RSI into their strategies, traders aim to forecast future price trends for cryptocurrencies. While RSI can occasionally produce misleading signals, those who understand its mechanics and interpretation methods can leverage it to predict price movements with significant accuracy.

RSI values range from 0 to 100. Typically, an RSI below 30 signals an oversold market, while an RSI above 70 indicates an overbought condition. These benchmarks serve as essential guides for traders seeking optimal entry and exit points.

RSI Calculation Formula for Crypto Assets

RSI is a momentum indicator calculated by comparing the average upward and downward price movements within a set period. The standard default is a 14-period timeframe, although traders can adjust this to fit their strategies.

The RSI formula is as follows:

• RSI = 100 − [100 / (1 + RS)]
• RS = Average Gain / Average Loss
• Average Gain = Sum of profits during upward periods within the specified timeframe / number of periods
• Average Loss = Sum of losses during downward periods within the specified timeframe / number of periods

This calculation quantifies relative strength, enabling traders to objectively evaluate whether the market is overheated or cooling off. Shorter calculation periods make RSI more sensitive, while longer periods provide more stable readings.

How to Interpret RSI in Crypto Markets

On most RSI charts, you'll see three lines: a dotted line at the 70 level, another at the 30 level, and a central wavy line representing the RSI itself. The RSI line may cross the boundaries but typically fluctuates between 30 and 70.

The central wavy line reflects the actual RSI value, which is used to judge whether current trading conditions are overbought or oversold. If the RSI drops below 30, it suggests the asset is oversold and a price rebound may be imminent. If RSI rises above 70, the asset is considered overbought, increasing the likelihood of a price correction.

The Relative Strength Index is a robust tool for gauging market conditions and identifying price trends. An RSI above 50 signals an uptrend. When RSI stays above 50, the market sentiment is bullish and prices tend to rise; when RSI remains below 50, it points to a bearish trend and falling prices.

RSI vs. MACD

MACD (Moving Average Convergence Divergence) is another leading momentum indicator, commonly used alongside RSI to measure the strength and direction of price movements.

MACD is calculated by measuring the difference between two EMAs (exponential moving averages), typically the 12-period and 26-period EMAs. This difference forms the MACD line. To this, a 9-period EMA of the MACD line is added as a signal line; their crossovers generate buy or sell signals.

A MACD line crossing the signal line from below is usually seen as a buy signal (golden cross), while crossing from above is interpreted as a sell signal (death cross). Changes in the MACD histogram—whether expanding or contracting—also help gauge the strength of a trend.

RSI evaluates recent price momentum, whereas MACD seeks to identify trend reversal points by comparing EMAs of different durations. Experienced traders often combine both indicators for more accurate price forecasts and to find stronger trade signals.

While both RSI and MACD are momentum indicators, they analyze different market aspects and use distinct formulas, which can result in conflicting signals. To make informed decisions, it's essential to use these indicators alongside other tools and consider the broader market environment.

What Is RSI Divergence in Crypto?

RSI divergence refers to a situation where a crypto asset’s price chart reaches new highs or lows, but the RSI does not show corresponding new extremities. This divergence signals waning trend momentum and is closely monitored by traders.

There are two primary types of RSI divergence:

• Bearish Divergence: When prices hit new highs but RSI fails to confirm new highs, instead posting a lower value than before. This indicates weakening upward momentum and suggests a potential downward reversal.

• Bullish Divergence: When prices reach new lows but RSI does not confirm new lows, maintaining a higher value than the previous low. Traders view this as evidence of fading downward momentum and often interpret it as a buy signal, anticipating a rebound.

Convergence and Divergence Between Crypto Prices and RSI

Two critical trading signals from RSI are convergence and divergence patterns. Recognizing these trends helps traders anticipate reversals before they happen.

Convergence occurs when both the price chart and the technical indicator move in the same direction. For example, if prices rise and RSI climbs as well, the current uptrend is likely healthy and sustainable.

Divergence, in contrast, happens when the price chart and the technical indicator move in opposite directions. This pattern warns that the current trend may be ending and a reversal could be near.

To spot these trends, traders focus on key price patterns:

• Higher High (HH): A new high that exceeds the previous high
• Higher Low (HL): A pullback that remains above the previous low
• Lower High (LH): A rally that stalls below the previous high
• Lower Low (LL): A new low that falls below the previous low

Combining these price patterns with RSI analysis enhances the accuracy of trend reversal predictions.

Failure Swing

A failure swing is a pivotal signal for trend reversals, occurring when the RSI indicator fails to set new highs in an uptrend or new lows in a downtrend, then reverses direction. This pattern indicates fading momentum and increases the likelihood of an impending price reversal.

There are two forms of failure swing:

• Failure Swing Top: If the price hits a new high but RSI drops below its previous swing low, it's a sign that the uptrend is losing strength—a sell signal. Specifically, after RSI surpasses 70, dips, tries to rise again but fails to reach a new high, then breaks below its previous low, the signal is confirmed.

• Failure Swing Bottom: If the price reaches a new low but RSI rises above its previous swing high, it's a sign of diminishing downward momentum—a buy signal. After RSI falls below 30, bounces, attempts to drop again but fails to make a new low, then rises above its previous high, the signal is confirmed.

Professional traders frequently use failure swings—alongside divergence—to anticipate trend reversals ahead of time.

How to Read RSI

RSI values range from 0 to 100, providing insight into overall market conditions. When RSI hovers around 50, buying and selling pressure are balanced, indicating market equilibrium.

Below 30, the market is considered oversold and a rebound is likely. Above 70, the market is seen as overbought or overheated, raising the odds of a downward correction.

It's important to note that these thresholds (30 and 70) are not absolute; traders may adjust them based on market conditions, asset characteristics, or strategy. For instance, strong trends may keep RSI above 70 or below 30 for extended periods.

What Is a "Bad" RSI?

Seasoned traders rarely rely on RSI alone. Instead, they use it in tandem with other technical indicators to pinpoint market trends and signals more accurately.

As a rule, selling when RSI is below 40 is discouraged, as it’s often driven by panic and may lead to greater losses. In an oversold market, it's typically better to look for buying opportunities.

Likewise, when RSI far exceeds 70, the market may be peaking. Emotional buying driven by FOMO should be avoided. Those already holding positions may consider taking profits, while new entrants are wise to wait for a price correction.

Ultimately, traders should evaluate not only RSI levels but also their direction, relationships with other indicators, and broader market conditions.

How to Use RSI in Crypto Trading

Many traders treat RSI as a core component of their trading strategies. Before opening a position, it's critical to confirm that RSI is signaling a clear trend change or entry/exit point.

To use RSI in crypto trading, first activate the RSI indicator on your preferred trading platform or charting tool. Nearly all major platforms allow you to add RSI to any price chart—simply search for "RSI" or "Relative Strength Index" in the technical indicators list.

Identifying Price Trends

If RSI rises above 50, it suggests an uptrend, making long positions attractive. In this case, waiting for a temporary dip near 50 and then entering as RSI rebounds can minimize risk.

Conversely, if RSI falls below 50, it points to a downtrend and opportunities for short positions. Here, a brief RSI spike to near 50 followed by renewed decline can signal a good entry point.

During persistent uptrends or downtrends, RSI often acts as support or resistance. For example, repeated rebounds near 40 during an uptrend indicate that level as a support line.

Identifying Divergence

Combining RSI with actual price charts helps traders spot possible turning points in advance. Identifying divergence is a powerful technique, but beginners should be cautious—misreading signals is common without sufficient experience and practice.

A reliable method for spotting divergence is to draw trend lines connecting clear highs and lows on both the price chart and RSI, then visually compare their directions for alignment or divergence.

Using RSI to Track Crypto Market Trends

RSI is a dependable technical indicator based on closing price data, proven effective in both stock and crypto markets.

The RSI indicator supports diverse strategies and interpretations. Before applying it in live trades, it's vital to learn how to read RSI charts accurately and practice combining RSI with other indicators like MACD, Bollinger Bands, and moving averages—demo trading is highly recommended.

RSI helps traders detect bear and bull market trends early, as well as build rules-based strategies for finding buy and sell signals. For instance, a rule such as "enter a buy position when RSI drops below 30 and then rises above 30" can be implemented for clarity and discipline.

Traders should continually monitor RSI convergence and divergence patterns. While it can be challenging for beginners to identify strong or weak divergence signals, investing time to master this skill pays dividends—when used effectively, RSI enables proactive detection of market turning points and the capture of major profit opportunities.

FAQ

What Is RSI, and How Is It Used in Crypto Trading?

RSI measures the speed and direction of price changes as a technical indicator. In crypto trading, it provides overbought and oversold signals—RSI above 70 means overbought, below 30 means oversold. Traders use these levels to identify possible trend reversals.

What Is the RSI Formula? How Is the 14-Period RSI Calculated?

The 14-period RSI is calculated as RS = (average gain over 14 days) ÷ (average loss over 14 days), then RSI = 100 − (100 ÷ (RS + 1)). Calculate the average gains and losses over 14 days, then use the ratio to determine RSI.

What Trading Signals Does RSI Above 70 or Below 30 Provide?

RSI above 70 signals a potential sell and an overbought market. RSI below 30 signals a potential buy and an oversold market. Both levels suggest possible reversal opportunities.

What Are the Main Crypto Trading Strategies Using RSI?

Key RSI-based crypto trading strategies include those focused on overbought/oversold levels, RSI divergence, and RSI swing rejection patterns.

Is It Risky to Trade Solely on RSI? How Can RSI Be Combined With Other Indicators?

Trading based only on RSI is risky. Combining it with tools like moving averages, MACD, and Bollinger Bands improves accuracy. MACD is useful for trend confirmation; Bollinger Bands offer support and resistance insights.