What is the Relative Strength Index (RSI)?

Relative Strength Index (RSI) Indicator in Crypto Explained

The Relative Strength Index (RSI) is a financial trading tool for identifying an asset’s strength at a given price.

In both crypto and traditional finance markets, RSI offers insights into price trends, as well as overbought and oversold conditions.

While not infallible, RSI is a useful gateway trading tool for beginners thanks to its easy-to-read signals and clearly-defined ranges.

What is the Relative Strength Index (RSI)?

The Relative Strength Index, commonly abbreviated to RSI, essentially tells traders how overbought or oversold an asset is at the current price. By extension, it signals how strong an uptrend or downtrend is and what might therefore come next.

RSI is a momentum oscillator — it features ranges of interest with clear boundaries which function as a call to action as price interacts with them.

The more historical price data an asset has, the better — its signals will be more reliable if there is a longer reference period to look back on.

RSI in Crypto

Cryptocurrencies such as Bitcoin and altcoins are as suited to RSI analysis as any other asset. 

Here, the indicator can help navigate infamously volatile market conditions. As standard, however, the longer a coin has existed, the more reliable RSI overbought and oversold signals, as well as trend information, will generally be.

Bitcoin RSI analysis on high timeframes, for example, will likely offer clearer signals than the same high-timeframe analysis applied to an altcoin which has only circulated for a year or less.

RSI is nonetheless flexible enough for use by both beginner and experienced crypto traders, and can feature as a valuable tool regardless of timeframe.

Calculating RSI

As a momentum oscillator, RSI features a scale of 0-100, between which a trendline moves. Within this scale is a range between 30 and 70 — these numbers form the boundaries between key levels of interest.

Calculating RSI involves compiling the average gain and average loss over a given lookback period. RSI parameters are flexible (see below), but by default, the lookback window is 14 periods.

Relative Strength Index (RSI):

RSI = 100 – [100 / (1 + (average of upward price change / average of downward price change)]

In practice, there is no need for manual RSI calculation, as the metric is one of the most popular in use by day traders and features among the most frequently used on the TabTrader app.

What is RSI used for in Crypto?

Bitcoin and altcoin traders heavily refer to RSI when analyzing market conditions — especially when snap up or downtrends enter — in order to make sense of volatile price action.

Both low and high-timeframe deployment can show the health of a given trend, as well as overbought and oversold conditions. RSI diverging from price trajectory is a key phenomenon to look out for.

The 70-30 RSI range

The most common and arguably most basic way to trade crypto markets using RSI revolves around two horizontal lines.

These are set at 30 and 70 on the RSI scale, and when price crosses them, signals are generated.

As RSI reading of less than 30 suggests that an asset is moving into “oversold” territory. The reverse is also true — crossing 30 is taken to denote the start of a new wave of buyer interest.

The 70 mark is complementary but with the signals reversed — price moving higher suggests “overbought” conditions, while a cross beneath can mean selling into a new downtrend.

Using the two lines, traders look for a convincing crossing of 30 to the upside in order to go long, and a convincing downside crossing of 70 to go short.

While this strategy sounds simple, however, it holds few reliable guarantees that RSI trajectory will offer continuation, and price trajectory with it. After crossing 30 to the upside, for instance, price can easily reverse and cancel out the viability of a long position. It could then reverse again or crisscross the 30 mark, creating risky trading conditions.

Centerline Crossover

With the 70-30 range, a more nuanced signal can help remove the uncertainty of crossovers at the extremes.

This involves a reading of 50, also known as the centerline. When price moves through 50 up or down — known as a centerline crossover — this adds conviction to an respective uptrend or downtrend. 

Traders seeking a less risky entry or who are looking to catch the phase of a trend with the clearest momentum thus look for a centerline crossover as confirmation to go long or short.

RSI analysis

Just like any momentum oscillator, RSI exhibits phenomena of its own which may be analyzed to ascertain future price action.

Just like price, divergences, trendline breakthroughs and breakdowns, as well as failed attempts at these, are all visible on RSI charts. 

RSI Divergences

Arguably the event most tracked by crypto traders on a regular basis are what are known as “divergences” between RSI and price itself.

These refer to periods when RSI is moving in one direction, but price is moving in another. 

As an example, RSI might be exhibiting a series of lower highs while price is climbing — this is known as a bearish divergence. Here, RSI is signaling that the underlying uptrend is running out of momentum and may reverse given the lack of support at such levels previously.

The opposite phenomenon — rising RSI against lackluster price action — is a bullish divergence. Upside continuation may result here, as price is not reflecting the level of market conviction as signaled by RSI behavior.

In the example above, BTC/USD prints a higher high on 1-hour timeframes while RSI prints a lower high — a bearish divergence. This precedes a breakdown in upside momentum for price.

Failure swings

Within the divergence mechanism lie initial signals of a forthcoming trend breakdown.

In what is known as a failure swing, RSI begins to make lower highs as price seeks higher highs — the beginning of a divergence which some traders may choose to leverage for a short entry.

An important sign is the first RSI swing high being above 70 and the second below.

The same can be visible at the start of a bullish divergence, as RSI begins to spike higher while price either languishes or puts in lower swing lows to reverse afterward.

In the example below, BTC/USD is headed toward what turns out to be a macro high, while RSI begins to print a bearish divergence in advance. 

Its first high is at 78, after which it reverses to print a local swing low of 52. It then bounces, but only reaches 67 before reverting downward. Once it passes 52, known as the failure point, the sell signal is in. 

Price behaves differently — at the first RSI swing high, it reaches $67,000, but at the second, sub-70 swing high, it tops out at $69,000.

Below is an example of a failure swing at the start of a bullish RSI divergence — Bitcoin’s multi-year low at the end of the 2022 bear market.

Here, an RSI swing low — which crucially cuts beneath the “oversold” 30 level — bounces to 37 before putting in a second swing low at 31. Only after this does it pass the failure point of 37 again to continue higher.

Trendline breaks

Another important leading indicator on RSI charts involves tests of the RSI trend itself. 

In a given trend, the relevant swing highs or lows can be joined with an additional trendline. If price is seen to be testing this repeatedly, it may be assumed that a breakout above (in an uptrend) or below (in a downtrend) is more likely.

This RSI trendline breakout precedes a similar event for price itself.

RSI Limitations

Despite its accessible nature, RSI is far from a foolproof trading tool for any and every market environment.

As can be seen from analyzing an RSI chart of a given asset over time, the indicator is no stranger to false signals — and these are especially common around the key 70 and 30 levels.

RSI can criss-cross levels of interest, as well as make an initial incursion into a new range before abruptly exiting it. This can in turn lead to premature reactions from traders, who then face consequences when the market fails to trend in the way that RSI suggested.

In general terms, the indicator is difficult to rely on in trending markets. In a Bitcoin bull market, for instance, RSI can quickly head into “overbought” territory above 70, ostensibly calling for an impending trend reversal. In reality, however, RSI commonly remains above 70 for extended periods during such extended bullish phases.

Traders can reduce the chance of being ‘duped’ by false signals by combining RSI with other indicators when analyzing trending markets. A ideal example is the Ichimoku Cloud — an all-encompassing indicator which offers reliable insights into future price action. Ichimoku requires several chart features to be in place in order to confirm a strong trend with good odds of success on entry. To learn about Ichimoku and how it works, read the dedicated TabTrader Academy article.

Conclusion

RSI is one of the most popular indicators in use among beginner and pro crypto traders alike, and for good reason.

The indicator offers easy-to-read signals on a chart which makes the general state of an asset understood at a glance. Only moderate research is required in order to start using the basic functionality of RSI and understand its components.

RSI can also be customized indefinitely to suit niche trading strategies or to increase or decrease the lookback period upon which its data is based.

The indicator’s vulnerabilities lie mainly in false signals. These become particularly common in markets experiencing a strong up or downtrend, and traders can easily lose out under these circumstances if they are acting solely on RSI moves. Using a combination of tools, for instance RSI together with the Ichimoku Cloud, can help mitigate this problem.

TabTrader features RSI as one of its essential crypto trading indicators available as standard for all users. 

In fact, the TabTrader terminal offers hundreds of indicators for use across the world’s biggest crypto trading platforms — all in one place, whether at home or on the go. With apps for iOS, Android and Web, there’s a solution for every trader. To experience the TabTrader app, download it here and revolutionize your trading.

New to crypto? Need more information about trading? The TabTrader Academy has the answers to all your questions.

Ps. For a more informal look into the crypto world, check out the TabTrader blog, which features lighter, easy-to-understand guides to crypto essentials. 

And if you have any questions about the operation of our product or about indicators and RSI in particular, you can always refer to the special article in our Help Center.

FAQ

What is RSI in crypto?

RSI stands for relative strength index — a popular trading tool in regular use across both crypto and traditional finance markets. RSI is a momentum oscillator which seeks to provide entry and exit signals based on the extent to which a given asset is overbought or oversold.

What is RSI trading?

Crypto traders can leverage RSI signals as part of their overall strategy. The indicator is simple to read, and the basic status quo of an asset can be easily gleaned from a cursory look at an RSI chart.

What is the best RSI setting for crypto?Rsi is a highly customizable trading indicator, but is generally used with the ‘standard’ lookback window of 14 periods. Basic use involves looking at interaction with three levels: 30, 50 and 70, but traders often deploy different ones based on their preferences.

What is the RSI 70-30 strategy?

One way to use RSI in crypto is to concentrate on how the trendline interacts with the ‘overbought’ 70 and ‘oversold’ 30 levels respectively. While not sufficiently reliable to form a trading strategy in itself, this leverages the key signals which RSI contains.

Is high RSI bullish or bearish?

Technically, an RSI reading of more than 70 implies that an asset is beginning to become overbought and a trend reversal should ensue. In practice, however — for example during crypto bull markets — RSI can stay at elevated levels for extended periods without the market abandoning its uptrend. The same is true for oversold conditions below 30.