The relative strength index (RSI) is one of the leading crypto trading indicators. It enables you to predict token price movements before they happen. Traders use it in combination with other indicators to better understand current prices, and as part of their trading strategies to help them make more educated buying and selling decisions.
What is RSI?
RSI was developed in 1978 to measure the size of recent price movements. In crypto, it informs traders when a token is over-bought or over-sold. It measures token price changes in intervals of 14 (14 hours on the hourly chart, 14 minutes on the minute chart, etc.).
RSI’s underlying formula divides the upward price history average by the average loss, then distributes this data on a scale from 0 to 100. If there’s been more buying than selling on the market, the RSI line goes up. If there’s been more selling than buying, then the line goes down.
RSI appears as an oscillator, which is a moving line graph representing the current level, and is located within the minimum and maximum ranges. Hence, the smallest RSI number is 0 and the largest is 100.
The line moves within the lower and upper ranges. When the RSI is below 30, the token is seen as over-sold. When it reaches or exceeds 70, it is considered over-bought. Both these levels signal a greater possibility of trend reversal or pull-back on a token’s price.
Traders usually locate the RSI beneath the price chart of a token as a convenient way to view its bullish and bearish signals. For example, in the image below of the BTC/HUSD trading pair, RSI is the yellow line, and the contrast area displays the 30 — 70 range.
What does the RSI tell you?
RSI can grow your chances of making a profitable trade by showing in which direction the price is more likely to move. As mentioned above, when RSI reading is under the minimum level of 30, the token is over-sold or under-valued. If RSI is over 70, it is over-bought or over-valued.
If the price surpasses the minimum horizontal level, you can expect it to increase at least momentarily, as this is a bullish sign. If the price over 70 falls below this level, you can expect a reversal or pull-back. Most of the time, however, the price tends to remain within the range of the two extremes.
If a token is on an up-trend, it will usually stay above 30 and frequently touch 70. On the contrary, if a token is on a down-trend, the RSI won’t exceed 70 and will often touch 30 .
You can use this information to understand current price trends and even predict trend reversals. For example, if a token’s price is trending upwards but the RSI doesn’t reach 70 and instead, drops quickly to 30, the trend might not continue and the price will reverse downwards.
Convrsely, if a token’s price is trending downwards but the RSI does not fall to 30 and instead, rises to to 70, there is a higher chance the trend will reverse upwards.
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