The Relative Strength Index (RSI) is one of the most powerful indicators across all markets, and the cryptocurrency market is no exception. It is a very simple indicator which makes it an ideal place to start learning technical analysis.
The RSI indicator’s main role is to identify the relationship between the price and the real offer/demand. Spotting areas where coins are at the peak of their strength, or bottom of their weakness is where this indicator becomes incredibly useful.
How to understand the RSI signals
The market provides an overbought signal when the RSI line crosses the 70 and an oversold signal when the RSI line crosses 30.
Overbought = Sell signal
Oversold = Buy signal
There is an extra layer to this interpretation however. A trader can also use the indicators 80/20 or even 85/15 instead of the traditional 70/30. This gives a far stronger signal, since it is very rare that the market can maintain it’s current momentum by the time the RSI indicator is signalling above 80 or below 20.
Working this way you can see that in the chart above there have been two strong sell signals and one medium buy signal issued by the RSI indicator since October 2017.
The other signal that the RSI indicator has provided us was what is called a “bearish divergence” a divergence can be spotted when the RSI indicator is moving the opposite direction to the price. In this scenario the RSI moved down as Bitcoin jumped from $16,000 to $20,000.
A bearish divergence, true to it’s name is a very strong sell signal which is usually followed by a rapid drop in price, as you can see on the chart. The strength of the signal is also increased as the RSI is above 80, already a strong sell signal that the asset is overbought.
It is also important to view multiple timeframes for example 1d, 6h, 1h to get a better indication on where the price is moving in the short, mid or long time periods.
The RSI indicator is a powerful tool that has withstood the test of time. Although it is never wise to follow any single indicator blindly, the relative strength index is one of the most commonly mentioned and traded indicators in the cryptocurrency market.
############################################
This article was written by CoinLoop the market leading cryptocurrency information platform. Check it out here.
############################################
