What is RSI and how to use it while trading crypto
Jul 17, 2022What is RSI and how do I use it?
Get your FREE bonus content on how I use my primary analysis tool (Elliott Wave and couple it with RSI) to make decisions on when to enter and exit trades.
RSI also known as Relative Strength Index is a momentum oscillator that measures the speed and change of price movements. In general, the indicator helps traders determine strength and weakness in any given asset. What we will discuss:
- Normal RSI ranges
- Overbought/Oversold Conditions
- Bullish/Bearish Divergences
Normal RSI Ranges:
RSI behaves differently in bear markets and bull markets.
During a bull market, RSI ranges from 40 to 90. The lower end of the range is viewed as "support" while the upper end of the range is considered "resistance".
In a bear market, the range typically stays in the 10 to 60 range. The lower end of the range is viewed as support and the upper end is viewed as resistance.
Overbought/Oversold Conditions:
Overbought conditions mean an extended price move to the upside. Oversold conditions mean an extended price move to the downside.
This tool is used to indicate potential exhaustion in the trend and to caution traders/investors of potential reversal areas. I consider price above these levels as market extremes. Indicating to me, price is unsustainable at these levels and a move to one side, or another is imminent.
As seen in the image below, overbought conditions are present above 70 and oversold conditions are below 30:
The chart below gives a clear example of these extremes in price when adding the RSI tool.
Bullish/Bearish Divergences:
Divergence in RSI is when an asset's price is making lower lows while the oscillator is making higher highs or vice versa. These divergences are used by traders to indicate a potential trend reversal is coming.
Bullish Divergences:
A bullish divergence is when price is making lower lows and the RSI oscillator is making higher highs.
Bearish Divergences:
A bearish divergence is when price is making a higher high and the RSI oscillator is making lower highs.
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