Cryptocurrency trading: How to use the RSI indicator to anticipate reversals?

With the moving averagesthe RSI is the most popular technical indicator.

What is the RSI indicator or Relative Strength Index

The Relative Strength Index or RSI is a momentum indicator that gauges the relative strength of market movement. This is the official definition. But this indicator is rather more convenient for identification of upward and downward price extension.

The RSI shows whether an asset is relatively overbought or oversold. It is part of the type indicators oscillator. We have an oscillator or graph which evolves between 2 limits between 0 and 100.

When the RSI is greater than 70, the asset is considered overbought. Thus, investors will anticipate a reversal of the markets, because the price has moved upwards quite quickly.

Similarly when the RSI is lower than 30, the asset is considered oversold. Thus, investors tend to anticipate a coming upside, as the price has rapidly accelerated downward.

On the Bitcoin chart above, we want to see that penetrations into oversold and overbought areas have been followed by price reversals. Except for the last. As if to remind us that the RSI does not work every time, like any indicator for that matter.

However, there are times when the RSI will hover above 70 or below 30 for a long time. This is the case during strong uptrends or downtrends.

But in general, the RSI set at 14 does not oscillate for long in the oversold (0-30) and overbought (70-100) zones.

RSI trading signals with the trend

When the trend is up, trend traders can use the RSI to buy when the RSI enters the oversold zone. So they make sure to trade with the trend instead of countering it.

The same concept applies to a downtrend, the trader waits for the RSI to enter the overbought zone to sell the asset.

For example, we see that the trend of Bitcoin is bullish in the long term, pullbacks that take the RSI into the 0-30 area can be buying opportunities.

dip rsi

On the chart above, the RSI is entering the oversold zone after staying above this level for a long time, this was an opportunity to buy Bitcoin. Buy the Dip !

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The bar of 50!

When the RSI goes below 50 and then goes back up, some traders take that as a buy signal, but it is irrelevant in my opinion.

In effect, this indicates that a pullback in price has taken place, and the trader buys when the trend resumes and the pullback appears to be over.

The same sell signal is obtained on the downside in a downtrend when the RSI crosses below 50.

The RSI rarely reaches the 30 value in an upswing until a potential reversal is underway, so the 50 measurement is used instead so as not to miss the entire upswing.

RSI divergences

Another method of use is to look for an RSI divergence between the price and the indicator.

A bullish divergence occurs when the price of a cryptocurrency makes a new low, but the RSI does not make a low (it makes a high). A bullish divergence is a signal for an upward reversal..

A bearish divergence occurs when the price of a cryptocurrency makes a new high, but the RSI does not make a higher (it makes a low). A bearish divergence is a signal for a bearish reversal..

rsi divergence

On this chart of Bitcoin, we see that the price bottoms out in May and then bottoms out in June. The RSI did not mark a low in June, but a high. Here we have a bullish RSI divergence that led to an upward reversal.

Personally, I watch the RSI to spot overbought and oversold moments and to anticipate reversals with divergences.

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