The abbreviation RSI refers to the Relative Strength Index. This is fundamentally a technical analysis (TA) indicator that gauges the power and speed of price fluctuations. Therefore, the RSI is a momentum oscillator that scrutinizes the size and velocity of market shifts.
In the late 1970s, J. Welles Wilder developed the RSI indicator to provide traders with a tool to analyze a stock’s performance. This technique was first introduced in Wilder’s book, New Concepts in Technical Trading Systems. The book also introduced other widely used charting tools, including the Average True Range (ATR), the Average Directional Index (ADX), and the Parabolic Stop and Reverse (also referred to as Parabolic SAR).
The RSI indicator, when utilized with default parameters, considers the asset’s price over 14 periods. Therefore, if the indicator is used on a candlestick chart, it gauges the price fluctuations based on the preceding 14 candles (for instance, 14 hours on hourly charts, 14 days on daily charts, etc.). From a technical perspective, the RSI calculates the average gain divided by the average loss and presents the data on a scale ranging from 0 to 100.
In the cryptocurrency industry, professionals utilize the Relative Strength Index (RSI) to identify potential overbought and oversold market scenarios. An RSI reading above 70 typically indicates an overbought situation. Conversely, an RSI reading below 30 could suggest an oversold situation.
An alternate method of utilizing the RSI indicator involves identifying possible price reversal points. This is achieved by traders observing what are known as bullish and bearish divergences. A bullish divergence occurs when the RSI and the asset price trend in contrasting directions.
To put it simply, the market price hits a lower low, but the RSI records a higher low. This implies that even though the price is falling, the demand to buy is on the rise. On the other hand, a bearish divergence signifies that the pressure to sell is escalating, even though the market price is climbing.
However, it’s important to highlight that the signals generated by the RSI indicator may not always be precise. Therefore, to mitigate risks, traders frequently integrate it with other technical analysis tools.
