What Is Relative Strength Index Indicator?
The Relative Strength Index (RSI) is a technical analysis indicator that maps price support and resistance levels.
It calculates the asset’s average gain or loss compared to the past 14 periods (typically days), returning a value between 0 to 100.
The RSI is neutral at 50. When it oscillates above or below, respectively, the buying volume is higher or lower than the selling volume.
Understanding the Functionality of the Relative Strength Index
The RSI allows investors to identify where assets may be overbought or oversold. It doesn’t predict price changes on its own, but it can improve precision when combined with more indicators. The minimum recommended time frame is 14 hourly periods.
The more extreme the RSI values, the easier it is for traders to recognize potential trend reversals. Typically, the RSI shows an asset as oversold when below 30 and overbought when above 70.
How to Calculate Relative Strength Index
The relative strength index formula is as follows:
Relative strength index calculation example: a 10% average gain and 4% average loss would return an RSI of 71.42 (overbought).
When the asset price moves in the opposite direction of the RSI, this divergence could signal a trend reversal. However, the RSI doesn’t indicate how long prices will stay at those levels (potentially months).
That’s why it’s often combined with others, such as the Moving Average Convergence Divergence (MACD).
What Is The Significance Of The Relative Strength Index?
The 30 and 70 RSI levels aren’t static and don’t always align with the long-term market behavior. The relative strength index meaning can change:
- In a bullish market, traders might look at 40 and 90 instead
- In a bear market, 10 and 60 could be safer
Regardless of the range, none of the levels necessarily point to a reversal—although it can still be a low-risk opportunity for long-term investors.
For shorter time frames, the RSI is more significant when compared to opposing price movements.
How to Use RSI for Technical Analysis
Below is the relative strength index technical analysis:
- Lower price lows and higher RSI lows might create a bullish divergence and price surge in a bearish trend.
- Higher price highs and lower RSI highs might create a bearish divergence and price drop in a bullish trend.
- Higher price lows and lower RSI lows are likely a hidden bullish divergence that continues the price surge of a bullish trend
- Lower price highs and higher RSI highs are likely a hidden bullish divergence that continues the price drop of a bearish trend
Important: The divergence likelihood depends on the trend strength, which traders can discover by reading the volume over time, MACD, and other indicators.
For that reason, hidden divergences are more reliable for short time frames. Regular divergences may need more indicators or longer times in case the trend continues.
“There are several ways to use swinging points, divergences, and crossing the centreline to produce signals. Furthermore, the RSI is often utilized to detect the unfolding trend.”
(SSRN, 2020)
RSI Indicator for Crypto Trading
There are minor differences when doing technical analysis with crypto relative strength indexes:
- Market volatility: Cryptocurrency prices can change rapidly every few weeks, and the default values don’t always make sense. Traders might use 21 periods instead of 14 and also set RSI levels at 20 and 80.
- Faster price movement: Since there’s faster price movement on altcoins, this favors hidden divergences over regular ones for price predictions.
- Bitcoin dominance: The majority of altcoins are correlated with Bitcoin’s movement. To plan for this, traders can use larger time frames and compare them with the Bitcoin RSI.
Panigrahi, A., & S.K., C. (2021, December 15). Trend identification with the relative strength index (RSI) technical indicator – a conceptual study. SSRN.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3986000
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