What is RSI?
The Relative Strength Index (RSI) is a technical indicator that measures the speed and magnitude of price movements. It helps traders assess whether an asset is overbought or oversold, offering insights into potential market trends.
RSI works by comparing an asset’s recent gains and losses over a set number of periods. A commonly used setting is 14 periods, but what does that mean?
Each periodrepresents a unit of time based on the chart’s timeframe:
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On a daily chart, RSI tracks the past 14 daysof price data.
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On a 4-hour chart, it considers the last 14 four-hour intervals.
By analyzing these price movements, RSI calculates a final value between 0 and 100:
RSI is most effective when used alongside other indicators to confirm trading decisions.
Understanding RSI Divergences
While many traders rely on RSI to detect overbought or oversold levels, it can also reveal divergences—discrepancies between price action and RSI values. These divergences can signal potential trend reversals beforethey happen.
Bullish Divergence
Occurs when the price makes lower lows, but RSI forms higher lows. This suggests that selling pressure is weakening, even though the price is still declining. Often, this is a precursor to an upward reversal.
Bearish Divergence
Occurs when the price makes higher highs, but RSI forms lower highs. This signals that buying momentum is fading, which could indicate a future downturn.
The Power of Divergences
RSI divergences act as valuable early-warning signals, helping traders spot trend shiftsbefore they become obvious. These signals are strongest when RSI reaches extreme levels—above 70 or below 30—as this often marks exhaustion points in the market.
While divergences appear across all timeframes, they are most effectiveon higher timeframes(such as the 4-hour and daily charts), where short-term market noise is reduced.
Conclusion
Mastering RSI divergences can enhance your cryptocurrency trading strategy, offering insights into shifting market momentum. However, no indicator is foolproof. To increase accuracy, always confirm divergence signals with other tools like trendlines, support/resistance levels, or volume analysis.
Happy trading—and trade smart!
wikipedia.org/wiki/Relative_strength_index
