What Is The RSI Indicator? How To Use The RSI Indicator Effectively In Crypto

What Is The RSI Indicator? How To Use The RSI Indicator Effectively In Crypto

The Relative Strength Index (RSI) is the most powerful technical analysis indicator in price action analysis for traders. Today, I will introduce you to this indicator and how to apply it in Crypto trading. All will be detailed so that you can best understand RSI.

What is the RSI indicator?

RSI indicator stands for the Relative Strength Index. It is used as an oscillator indicator to measure the speed and change of price movements. RSI ranges from 0 to 100 to measure overbought and oversold of the market. In analyzing, using RSI can help you identify reversal points at peaks and troughs of price trends.

What is the RSI indicator?
What is the RSI indicator?

The RSI indicator consists of 3 main elements:

  • RSI line (light blue) is the line that runs along with the price chart, indicating the change and speed of price movements. Usually, this line ranges from 30 to 70. However, sometimes, it surpasses and touches the upper and lower limits of the indicator.
  • The overbought zone (from the overbought line (70) and above) is the zone to which the RSI reaches signaling that the price has gone up too high. Prices will adjust to decrease
  • The oversold zone (from the oversold line (30) and below) is the zone to which the RSI reaches signaling that the price has fallen too low. Prices will adjust to increase after that.

How to use the RSI indicator

Strategy 1. Using the RSI indicator to identify price trends

This is the basic signal of RSI. As observed, when the RSI rises and moves from the oversold zone(30) to the overbought zone (70), the price goes up. And vice versa, when the RSI heads down and goes from the overbought zone (70) to the oversold zone (30), the price is in a downtrend.

How to use the RSI indicator
How to use the RSI indicator

Strategy 2. Predicting the probability of a price reversal based on the divergence of RSI

This is an advanced signal and is the best signal that RSI supports traders.  The RSI divergence is reflected in its opposite response to the price direction.

Specifically:

RSI bullish divergence

+ The price is in a downtrend, creating 2 consecutive troughs with the first trough lower than the previous one but the RSI is in an uptrend. After this divergence, there is a high probability that it will be a bullish trend again.

RSI bullish divergence

RSI bearish divergence

+ The price is in an uptrend, creating 2 consecutive peaks with the first peak higher than the previous one but the RSI is in a downtrend. After this divergence, there is a high probability that it will be a bearish trend again.

RSI bearish divergence
RSI bearish divergence

How to effectively trade Crypto using the RSI indicator

In this section, I will show you how to trade Crypto with the RSI indicator. There will be entry points, take-profit, and stop-loss to optimize profits.

Notes: The following strategies to open an order should only be done with a Demo account. These are test transactions to get you familiar with as well as test the effectiveness of the RSI indicator. Absolutely do not apply it on a real account.

Strategy 1. Trade Crypto following RSI overbought – oversold signals

This method purely uses the RSI indicator because you only need to observe it for opening orders.

Conditions: A 30-minute or 1-hour Japanese candlestick chart. RSI indicator with (14,70,30) parameters.

How to open an order

+ Open a BUY order with the RSI indicator as follows:

  • Entry Point: Right after the RSI touches the oversold zone (30) and bounces back. It is usually after a green bullish reversal candlestick appears.
  • Stop-Loss: At the lowest price level before rebounding.
  • Take-Profit: We take profit when the RSI touches the overbought (70).
Trade Forex following RSI overbought - oversold signals
Trade Crypto following RSI overbought – oversold signals

+ Open a SELL order with the RSI indicator as follows:

  • Entry Point: Right after the RSI touches the overbought zone (70) and decreases. It is usually after a red bearish reversal candlestick appears.
  • Stop-Loss: At the highest price level before falling back.
  • Take-Profit: We take profit when the RSI touches the oversold (30).
Trade Cryptox following RSI overbought – oversold signals

Strategy 2. Trade Crypto following the RSI divergence

This combination uses the trend signal of RSI. Compared to Strategy 1, the RSI divergence has higher accuracy. However, the chances of opening orders are fewer since RSI divergence is rarely seen.

Conditions: An M30 or H1 Japanese candlestick chart. RSI indicator with (14,70,30) parameters.

When the RSI bullish divergence appears, open a BUY order as follows:

  • Entry Point: Right after the RSI bullish divergence appears. There, the price finishes creating the lower trough and starts rising again.
  • Stop-Loss: At the lowest price level before the RSI divergence appears.
  • Take-Profit: We take profit when the RSI touches the overbought (70).
Trade Forex following the RSI bullish divergence
Trade Crypto following the RSI bullish divergence

When the RSI bearish divergence appears, open a SELL order as follows:

  • Entry Point: Right after the RSI bearish divergence appears. There, the price finishes creating the higher peak and starts falling again.
  • Stop-Loss: At the highest price level before the RSI divergence appears.
  • Take-Profit: We take profit when the RSI touches the oversold (30).
Trade Crypto following the RSI bearish divergence

Notes when using the RSI indicator in Crypto trading

+ The RSI indicator is mostly used to identify the market trend. Traders rarely use it to search for trades. It’s because all indicators go after the price. Therefore, there is always a certain lag from the indicator compared to the price.

+ The RSI is best used when combined with signals from candlesticks and candlestick patterns.

+ Absolutely do not trade Crypto using RSI with short time frames such as 5 minutes, 10 minutes.

Using RSI is a skill you need to pocket on your Crypto trading journey. This is an indicator used a lot by successful traders. Experience and familiarize yourself with RSI on a demo account. I wish you successful transactions.

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