How to Use and Calculate the RSI in Cryptocurrency Trading

What Is RSI?

RSI (Relative Strength Index) is a key indicator in cryptocurrency trading, widely used to measure the velocity of price changes and assess overall market trends. RSI serves as a primary benchmark for determining whether a cryptocurrency is overbought or oversold.

Technical analyst J. Welles Wilder Jr. developed the RSI in 1978. Since then, it has been widely adopted in equities, forex, and, more recently, cryptocurrency markets.

Traders use RSI to forecast future cryptocurrency price movements. Although the indicator may occasionally generate misleading signals, traders who understand its mechanics and interpretation can make accurate predictions about upcoming price movements. In practice, many professional traders enhance their trade precision by combining RSI with other technical indicators.

RSI values range from 0 to 100. Typically, an RSI below 30 signals an oversold market, where a price rebound could be expected. Conversely, an RSI above 70 indicates an overbought market, suggesting a likely price correction. These thresholds, however, can be adjusted according to market conditions and individual trading strategies.

How to Calculate RSI in Crypto Markets

RSI calculates the ratio of average upward price movements to average downward price movements over a defined period. The default setting is 14 periods, but traders can adjust this timeframe to match their strategies or analysis objectives. Short-term traders might use 7 or 9 periods, while long-term investors may prefer 21 or 28 periods.

The RSI calculation is as follows:

• RSI = 100 − [100 / (1 + RS)]
• RS = Average Gain / Average Loss
• Average Gain = Total Gain over Period / Number of Periods
• Average Loss = Total Loss over Period / Number of Periods

To calculate RSI, first determine the daily changes in closing prices for the selected period. Then, compute the average gain for up days and the average loss for down days. Calculate the RS ratio, and derive the final RSI value.

In practice, traders do not need to perform these calculations manually. Most trading platforms now calculate and display the RSI automatically as a line chart, allowing traders to focus on market analysis rather than manual computation.

How to Read the RSI in Cryptocurrency Trading

Standard RSI charts display three key lines: a dotted upper line (usually at 70), a dotted lower line (usually at 30), and a solid line in the middle representing the current RSI value. This solid line typically oscillates between the upper and lower dotted levels, occasionally crossing them.

The solid line reflects the actual RSI value. Traders determine overbought or oversold conditions by its position. When RSI falls below 30, the asset is considered oversold, and a price rebound could follow. When RSI rises above 70, the asset is considered overbought, increasing the probability of a price correction or decline.

RSI does more than identify overbought or oversold markets—it also helps traders assess overall market sentiment and spot trend direction. The 50 line serves as a trend reference: RSI values above 50 indicate a bullish trend, while values below 50 signal a bearish trend.

Despite the valuable insights RSI provides, traders should avoid relying on any single indicator. Combining RSI with other tools enables more accurate buy and sell signals and improves the reliability of trading decisions. Confirmation from multiple indicators is especially critical in the highly volatile crypto market.

RSI vs. MACD: Comparing Two Core Momentum Indicators

MACD (Moving Average Convergence Divergence) is another widely used momentum indicator, often paired with RSI. MACD also measures the strength and direction of price movements, but its calculation and interpretation differ from RSI.

MACD tracks the divergence between two exponential moving averages (EMAs), typically the 12-period (short-term) and 26-period (long-term) EMAs. The difference between these two EMAs forms the MACD line. A 9-period EMA of the MACD line is also plotted as the signal line, and the crossover points between the MACD and signal lines are significant trade signals. Many traders use these crossovers to time short-term buying and selling decisions.

Generally, when the MACD line crosses above the signal line from below, it is a buy signal (golden cross). When it crosses below from above, it is a sell signal (death cross). The MACD line’s position relative to the zero line also helps define overall trend direction.

While RSI directly measures recent price momentum, MACD detects changes in trend by analyzing the relationship between moving averages of different timeframes. Many experienced traders use both indicators together for a more comprehensive market view and to increase the accuracy of their price forecasts. When both indicators align, the signal’s reliability strengthens significantly.

Although both RSI and MACD are momentum indicators, they use different calculations and capture different aspects of the market. Their signals may sometimes conflict. In such cases, traders should consider other indicators and the broader market context before making decisions.

What Is RSI Divergence in Crypto?

RSI divergence describes situations where the price chart and the RSI indicator move in opposite directions. This typically happens when price sets a new high or low, but the RSI fails to confirm with a corresponding new high or low. This signal suggests waning trend momentum and often precedes a reversal.

There are two main types of RSI divergence:

• Bearish Divergence: Price makes a new high, but RSI forms a lower high and cannot exceed its previous peak. This shows weakening bullish momentum and often signals a potential price decline. Traders usually interpret this as a sell signal.

• Bullish Divergence: Price makes a new low, but RSI forms a higher low and does not fall below its prior trough. This suggests weakening bearish momentum and a possible price increase. Traders generally view this as a buy signal.

RSI Convergence and Divergence with Crypto Prices

Two critical signals from RSI are convergence and divergence trends. Traders use these to pinpoint current market direction and anticipate potential trend reversals.

Convergence occurs when price and RSI move in the same direction—rising prices with rising RSI or falling prices with falling RSI. This alignment signals a strong, sustainable trend.

Divergence is the opposite: price and RSI move in different directions. Such mismatches often warn of underlying trend weakness and frequently precede reversals.

A classic divergence pattern is when price hits consecutive new highs, but RSI declines and forms lower highs. This suggests price gains are losing support from buying pressure and may not be sustainable.

To identify these trends, traders should monitor the following price patterns:

• Higher High (HH): A new high above the prior high
• Higher Low (HL): A new low above the prior low
• Lower High (LH): A new high below the prior high
• Lower Low (LL): A new low below the prior low

RSI divergence commonly appears before a trend reversal or a break of a key support line. Traders who spot these patterns early can anticipate reversals and increase profit opportunities.

Failure Swing

A failure swing is a strong signal of potential trend reversal. It occurs when RSI fails to set a new high during an uptrend, or a new low during a downtrend, indicating fading trend momentum. There are two main types:

• Top Failure Swing: Price sets a new high, RSI enters the overbought zone (above 70), then falls below the recent swing low (usually near 50). This suggests the uptrend is losing strength and a downtrend may follow—a sell signal. If RSI exceeds 70, falls, tries to rise again without breaking the previous high, then drops below 50, it’s a strong sell signal.

• Bottom Failure Swing: Price sets a new low, RSI enters the oversold zone (below 30), then rises above the recent swing high (usually near 50). This indicates the downtrend is fading and an uptrend may follow—a buy signal. If RSI drops below 30, rises, tries to fall again without setting a new low, then moves above 50, it’s a strong buy signal.

Failure swings are regarded as more reliable than simple overbought or oversold signals and are closely monitored by professional traders.

How to Interpret RSI: Practical Guidelines

RSI readings range from 0 to 100, providing insight into market conditions. An RSI near 50 signals a neutral market with balanced buying and selling pressure.

Values below 30 indicate an oversold market and suggest a potential price rebound. In this case, most investors may have finished selling, and buyers are likely to return.

Readings above 70 indicate an overheated (overbought) market, signaling a likely price correction or temporary drop. In this scenario, most investors have already bought, so further upside is limited.

Traders use these thresholds to gauge if buying or selling pressure has reached an extreme. For instance, if RSI reads 75 and the asset price has surged in recent weeks, the market is clearly overheated and a price pullback is likely. In such cases, opening new long positions is ill-advised, and taking profits on existing positions may be wise.

The speed and slope of RSI movements also offer valuable clues. Rapid changes mean strong momentum but may also indicate overreactions. Gradual movements suggest the trend is more sustainable.

RSI Conditions to Avoid

Traders usually combine RSI with other indicators to pinpoint market trends and signals. Many experienced traders develop proprietary systems centered around RSI.

As a general rule, avoid selling when RSI is below 40. Doing so is often panic selling, leading to poor execution. Selling into an already oversold market increases the risk of stop-losses at the bottom.

Similarly, do not open new positions when RSI is well above 70—especially above 75. This typically signals the peak of a bull run, and buying now is often driven by FOMO (Fear of Missing Out), which greatly increases the risk of buying the top and facing an immediate correction.

A better approach is to wait for RSI to return from extreme levels to the neutral 40–60 range, confirm the trend’s continuation, and then enter trades. This helps avoid emotional decisions and improves entry price.

Practical Applications of RSI in Crypto Trading

RSI is often a core element in trading strategies. Before entering a position, confirm that RSI is showing a clear trend shift or entry signal. Depending on account type and trading style, traders can use RSI for both long (buy) and short (sell) positions.

Most leading trading platforms now provide tools for forecasting crypto price movements and executing various trade types, including spot, leveraged, and derivatives trading.

However, traders must always recognize that cryptocurrencies are extremely volatile assets. Technical indicators are powerful, but not infallible, and may generate false signals—especially during sudden market moves or unexpected news events.

To use RSI in crypto trading, first enable the RSI indicator on your trading platform. Most major platforms allow you to add RSI to any price chart via the technical indicators menu—simply search for "RSI" and add it.

A Practical Approach to Identifying Price Trends

When RSI stays above 50, the market is likely in an uptrend. In this situation, watch for temporary price pullbacks and look for long opportunities as RSI holds above 50. Enter buys during corrections if the RSI remains strong.

When RSI is below 50, the market is likely in a downtrend or bearish phase. In this case, look for temporary rebounds and seek shorting opportunities.

During uptrends or downtrends, RSI often acts as support or resistance near key levels like 40 or 60. If RSI bounces at these levels, momentum is intact and the trend will likely continue. If these levels are breached, a reversal may be underway.

Trend-following traders can improve their win rates by aligning trades with the direction of RSI relative to the 50 level.

Advanced Divergence Identification Techniques

Comparing the RSI and price charts together provides clues for predicting future moves. Identifying divergence is a powerful tool for spotting market turning points early, but it requires practice and experience—especially for beginners.

To spot divergence accurately, identify clear patterns of highs and lows on both the price and RSI charts. Compare consecutive highs (or lows) on price versus their RSI counterparts, and check whether they move together or diverge.

For bearish divergence: price forms a higher high while RSI forms a lower high, signaling fading bullish momentum—a potential sell signal.

For bullish divergence: price forms a lower low while RSI forms a higher low, signaling weakening bearish momentum—a potential buy signal.

Divergence is very useful but should never be used in isolation. Always confirm with other indicators, price patterns, and key support/resistance levels.

A Comprehensive Approach to Using RSI in Crypto Markets

RSI is a reliable momentum indicator based on closing prices, with a long history in equities and a proven track record in crypto markets.

There are many ways to interpret and use RSI, so new traders should first master the basics of reading RSI charts. Then, invest time in learning to combine RSI with other tools such as MACD, Bollinger Bands, and moving averages. Practical experience—through demo accounts or small trades—helps you understand how RSI interacts with real price movements.

RSI helps traders spot bear and bull trends early and build robust strategies for buy and sell signals. While many traders focus on short-term day or swing trades, RSI tends to provide stronger signals on longer timeframes, where short-term volatility is smoothed and trends are clearer.

Additionally, pay close attention to convergence and divergence patterns in RSI. While mastering divergence can be challenging for beginners, it’s worth the investment—divergence is one of the few signals that can anticipate market turning points, and mastering it can significantly boost your trading success.

Finally, no indicator is a substitute for risk management. Always use stop-loss orders, manage position sizes, and avoid emotional trades. RSI is powerful, but only delivers its true value when combined with sound risk management.

FAQ

What Is RSI (Relative Strength Index)? How Is It Used in Crypto Trading?

RSI (Relative Strength Index) measures the speed of asset price movements and is a widely used technical analysis tool. In crypto trading, RSI is shown on a 0–100 scale; readings above 70 indicate overbought conditions, while below 30 indicate oversold levels. Traders use these signals to time entries and exits.

What Is the RSI Formula? How Do You Calculate a 14-Period RSI?

The 14-period RSI formula is RS = average gain ÷ average loss, and RSI = 100 − (100 ÷ (1 + RS)). Steps: 1) Sum gains and losses for the past 14 periods; 2) Calculate the averages; 3) Calculate RS; 4) Calculate RSI. Values above 70 suggest overbought, below 30 suggest oversold conditions.

What Are RSI’s Buy and Sell Signals? What Do Below 30 and Above 70 Mean?

RSI below 30 means the asset is oversold—a buy signal. RSI above 70 means overbought—a sell signal. These thresholds reflect extreme market conditions and indicate a potential price reversal.

How Does Changing the RSI Period Affect Results? What Settings Are Recommended for Short- and Long-Term Trading?

Shorter RSI periods react faster, suitable for short-term trading but with more false signals. Day trading typically uses 9–14 periods; swing trading prefers 21–28. Adjust the period to fit your trading style.

Is It Risky to Trade Using Only RSI? What Should You Consider When Combining It With Other Indicators?

Trading with RSI alone is risky. Combine it with MACD, Bollinger Bands, or moving averages for higher accuracy. Confirm signals across multiple tools and adjust combinations for market conditions.