The crypto Relative Strength Index – RSI: what is it and how does it work?

The Relative Strength Index – RSI – is one of the most watched indicators by crypto traders. 

But what is it and how does it work? 

Here is a brief guide.

The crypto Relative Strength Index – RSI: oversold and overbought market?

In the crypto industry, there are several tools used to support traders’ choices. One of the most popular is the Relative Strength Index or RSI, which measures the pace and direction of a cryptocurrency’s recent price movements, indicating its “trading strength.” 

Basically, the RSI is used to identify the timing of trades so as to seize swing trading opportunities. 

Traders usually read this percentage index, which ranges from 0 to 100, to understand whether a particular crypto is in a state of “oversold”, and thus destined to go up in price, or “overbought”, and thus destined for a downward correction. 

In this regard, J. Welles Wilder introduced the metric showing that there are two levels of RSI, which describe whether that crypto’s market is oversold or overbought:

  • If the RSI is below 30, you are in an oversold market, so the price of the crypto will go up in the short term;
  • If the RSI is above 70, you are in an overbought market, therefore the price of the crypto will go down in the short term.

Beyond these key considerations, there are also the “special” situations that can change the strategies of traders using the crypto Relative Strength Index. 

To give a practical example, if a crypto rides a bull market, then the trader might consider the market condition oversold even with an RSI as high as 40. Conversely, if it were in bear market, the oversold condition could already be considered with an RSI as low as 10%. 

The Relative Strength Index – RSI in crypto-trading

Before understanding the crypto-trading opportunities that arise through the use of the RSI, it is only fair to understand its structure, namely its formula. 

RSI = 100 – [100 / (100 / (1 + (average gain of n days of market close on the upside / average loss of n days of market close on the downside)]

This formula suggests that to know the Relative Strength Index, one must consider the average price gains and losses of a crypto, over a given period of time.

That said, based on the RSI of a particular crypto, traders may decide to make certain choices. 

Among many, there is the option to exit a position when the RSI is above 70, or to enter by buying down when the RSI is below 30. 

Another strategy using the RSI, can be “swing trading,” and that is when the trader decides to trade in the short term between price rises and falls. 

The record oversold RSI on Bitcoin in August 2023

In mid-August, Bitcoin’s daily time frame chart recorded the lowest RSI since November 2022, that is, since the period related to the collapse of the FTX crypto-exchange. 

Specifically, Bitcoin’s RSI a few weeks ago had marked 24.22, suggesting that BTC’s bear market may have run out of steam. 

As anticipated, an RSI below 30 should lead to a rise in price in the short term

And indeed, during the collapse of FTX in November 2022, Bitcoin’s Relative Strength Index was 24.70 and in fact BTC had reached its low at $15,670. From then on, until mid-April, the price of BTC went on a bull run until it touched $30,000, a pump of +95%. 

Returning to the present, from mid-August to the present, BTC has not fallen beyond the low of $25,700 touched when the RSI was at its lowest, but has experienced a pump that has brought it back to $28,000.

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