How to Read the RSI Indicator: A Must-Learn “Heat Gauge” for Crypto Beginners

What Is the RSI Indicator?

In the fast-moving cryptocurrency market, investors must assess market momentum. The Relative Strength Index (RSI) is a widely used technical indicator that measures market momentum to determine whether a cryptocurrency is overbought or oversold. It measures the intensity of market sentiment and helps traders anticipate potential trend reversals.

RSI values range from 0 to 100. They are typically calculated over a 14-day period.

• Traders generally view an RSI above 70 as an “overbought” signal, suggesting the market may be overheated and a price correction could occur.
• Traders consider an RSI below 30 an “oversold” signal, indicating prices may be near a bottom and a rebound could be imminent.

How RSI Is Calculated

The RSI calculation compares upward strength to downward strength using the following formula: RSI = 100 - [100 / (1 + RS)]

RS (Relative Strength) equals Average Gain divided by Average Loss. Simply put, when a cryptocurrency’s gains over the past 14 days significantly exceed its losses, RSI increases; when losses surpass gains, RSI decreases.

Most trading platforms, including Gate, automatically display the RSI curve. Users do not need to perform manual calculations; they simply enable the RSI indicator on their charts.

Practical RSI Strategies in Crypto Markets

1. Identifying Overbought and Oversold Conditions

For leading cryptocurrencies such as BTC and ETH, an RSI above 70 often signals that prices have risen rapidly in the short term. An RSI below 30 indicates the market is experiencing panic, which may create a buying opportunity.

2. Using RSI Divergence Signals

When price reaches a new high but RSI does not, this is called “bearish divergence,” typically warning that the uptrend may be losing momentum. Conversely, when price hits a new low but RSI does not, it is called “bullish divergence,” which may signal an impending trend reversal.

3. Monitoring the 50 Level

An RSI above 50 indicates bullish market sentiment, while an RSI below 50 reflects stronger bearish pressure. Many traders use this level as a key reference point for determining trend direction.

Advantages and Disadvantages of RSI

Advantages:

• RSI is easy to use and well-suited for beginners.
• It effectively tracks shifts in market sentiment.
• Accuracy improves when RSI is combined with other indicators, such as MACD and Bollinger Bands.

Disadvantages:

• In trending markets (like prolonged bull or bear runs), RSI can stay elevated or depressed for extended periods. This can distort signals.
• Traders should confirm RSI signals with additional data, such as trading volume and candlestick patterns.