It is a widely used momentum oscillator in technical analysis that helps traders identify whether an asset is overbought or oversold.
It provides information about possible price reversals and is displayed on a scale of 0 to 100, indicating potential price reversal points.
Usage and Interpretation of the Crypto RSI
The RSI measures the speed and change of recent price movements, typically over a 14-day period. The standard interpretation is as follows:
Values above 70 (overbought): An RSI reading of 70 or above suggests that the cryptocurrency may be overbought, indicating that a price pullback or correction may occur. Traders might consider this a potential sell or exit signal.
Values below 30 (oversold): An RSI reading of 30 or below indicates that the asset may be oversold, signaling a possible buying opportunity or an imminent price rebound upwards.
Mid zone (30-70): Values between 30 and 70 are generally considered neutral and suggest that the market is in a range or trend without clear extremes of momentum.
Advanced Strategies
In addition to overbought/oversold levels, cryptocurrency traders use the RSI to detect:
Divergences: They occur when the price of an asset and the RSI indicator move in opposite directions, suggesting a possible trend change. For example, if the price reaches a new low but the RSI forms a higher low (bullish divergence), this may indicate that selling momentum is weakening and an upward trend change is likely.
Trend Confirmation: In markets with strong trends, the RSI can remain above 70 or below 30 for extended periods without immediately reversing. In these cases, some traders adjust the thresholds to more extreme levels, such as 80 and 20, to reduce false signals.
To obtain more reliable signals, traders often combine the RSI with other technical indicators and candlestick patterns.
Considerations in Volatile Markets
Given the high volatility of the cryptocurrency market, the RSI can enter and remain in extreme zones (above 70 or below 30) for longer periods than in traditional markets. Therefore, traders often combine the RSI with other technical indicators (such as moving averages or Bollinger Bands) to confirm signals and avoid false signals. Some traders also adjust the thresholds to more extreme levels, such as 80 and 20, to filter out market noise in very strong trends.
The Relative Strength Index (RSI) is not a direct and official component of the main calculation of the well-known Crypto Fear & Greed Index.
The standard index is based on six other key factors:
Volatility (25%)
Market Volume and Momentum (25%)
Social Networks (15%)
Bitcoin Dominance (10%)
Google Trends (10%)
Surveys (15% - currently paused).
However, the RSI plays an important role in trading practice and in the overall sentiment analysis in two ways:
1. Parallel Sentiment Indicator
Although it is not integrated into the main formula of the index, the RSI is a complementary tool that traders use to confirm or contrast the reading of the Fear & Greed Index.
Signal Confirmation: If the Fear & Greed Index shows 'Extreme Fear' and, simultaneously, the weekly RSI shows a bullish divergence or is in oversold territory (below 30), this reinforces the signal that a potential price rebound is near, aligning with the maxim of 'being greedy when others are fearful.'
Signal Contrast: If the index shows 'Extreme Greed' but the RSI still remains neutral (between 30 and 70), traders may be more cautious in interpreting that the market is overheated, waiting for both indicators to align.
2. Component in Alternative Versions of the Index
Some developers and trading platforms have created their own custom versions or complementary indicators that do incorporate the RSI to measure sentiment. These modified indicators use the overbought levels (>70, greed zone) and oversold levels (<30, fear zone) of the RSI to map them directly to a visual meter of 'fear and greed.'
In summary, the RSI is a powerful momentum tool in its own right that, while not part of the benchmark index, is widely used by traders as a key indicator to assess market sentiment and extremes, providing valuable insights into whether the market is dominated by fear or greed.