RSI
Understanding the Relative Strength Index (RSI) for Crypto Trading
Welcome to this guide on the Relative Strength Index, or RSI, a popular tool used in Technical Analysis to help traders make informed decisions in the volatile world of Cryptocurrency Trading. This guide is designed for complete beginners, so we’ll break down everything step-by-step.
What is the RSI?
The RSI is a *momentum indicator* that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a Cryptocurrency. In simpler terms, it tells us if a crypto is potentially due for a price correction – either up or down. It was developed by John Welles Wilder Jr. and first appeared in his 1978 book, *New Concepts in Technical Trading Systems*.
Think of it like this: if a runner sprints full speed for a long time, they’ll eventually get tired and need to slow down. The RSI tries to identify when a crypto’s “sprint” (price increase) is likely to end.
The RSI value oscillates between 0 and 100.
How is the RSI Calculated?
Don’t worry, you don't *need* to calculate this by hand! Trading platforms like [[Binance](https://www.binance.com/en/futures/ref/Z56RU0SP Register now)], [[Bybit](https://partner.bybit.com/b/16906 Start trading)], [[BingX](https://bingx.com/invite/S1OAPL Join BingX)], [[Bybit](https://partner.bybit.com/bg/7LQJVN Open account)] and [[BitMEX](https://www.bitmex.com/app/register/s96Gq- BitMEX)] do it for you. However, understanding the basics can help you interpret it better.
The formula looks at the average gains and average losses over a specific period (usually 14 days, but we'll discuss this later). Here's a simplified explanation:
1. **Calculate Average Gains:** Add up all the price increases over the period and divide by the period length. 2. **Calculate Average Losses:** Add up all the price decreases (treated as negative numbers) over the period and divide by the period length. 3. **Calculate Relative Strength (RS):** Divide the Average Gain by the Average Loss. 4. **Calculate RSI:** 100 – (100 / (1 + RS))
Again, your trading platform handles this. You’ll simply add the RSI indicator to your chart.
Interpreting the RSI
Here’s where it gets useful. The RSI provides signals based on its value:
- **Overbought (Above 70):** A reading above 70 suggests the crypto may be overvalued and could be due for a price
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