The Relative Strength Index (RSI) is a tool that helps you understand whether an asset, such as a cryptocurrency, is trading too high (overbought) or too low (oversold). Its values indicate whether it is likely that the price will change direction.
What does RSI look like?
RSI is a number from 0 to 100 that is displayed on a separate chart below the main price chart.
If the RSI is above 70, the asset is considered overbought and the price may fall.
If the RSI is below 30, the asset is considered oversold and the price may increase.
How does it work?
RSI looks at how quickly the price of an asset changes over a given period (usually 14 days).
If the price is rising for a long time and quickly, the RSI rises closer to 100.
If the price falls, the RSI drops to 0.
A simple example:
Imagine you see a graph:
1. The price of Bitcoin $BTC has risen sharply, and the RSI = 85. This means that many people are buying, but perhaps too much. It may be time to wait or sell.
2. The price of XRP $XRP has been falling for several days, and RSI = 25. This shows that the asset is oversold, meaning that many people have been selling, and the price may start to rise soon.
How do traders use RSI?
1. Buy when the RSI is less than 30, because there is a chance that the price will go up.
2. Sell when RSI is above 70, as the price may fall soon.
3. Look at the crossings of the 50 line (average value).
If the RSI rises above 50, it is a good sign to buy.
If it drops below 50, it is a signal to be cautious.
What should you remember?
RSI is not always perfect. For example, in a strong trend (the price is constantly rising or falling), RSI can remain above 70 or below 30 for a long time. Therefore, it is important to use it in conjunction with other tools, such as support and resistance levels or trend lines.
This is an easy way to understand whether it is time to buy or sell, but always consider the overall market situation.
