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What Is an RSI Indicator in Crypto Trading?

There are many ways to trade the crypto market, and understanding how to use technical tools will give you an unprecedented advantage. Crypto trading requires a staunch understanding of technical analysis, and that is where most traders fail.

To be a successful technical analyst, you need to leverage the use of indicators as they make your analysis so much better. And one of the best indicators to boost your trades is the Relative Strength Index (RSI) indicator.

Read on to discover what RSI is, how it works, and how to use it in crypto trading.

What is the RSI Indicator?

To put simply, the RSI indicator is a technical tool you can use to identify the strength of the price action of an asset — it determines the overbought and oversold conditions of the market.

The RSI indicator achieves this by acting as a momentum oscillator, which determines the volume of the recent losses and gains, and this enables the indicator to determine the next possible trend direction of the market.

How Does The RSI Indicator Work?

The RSI indicator works by taking the ratio of the average volume of recent gains and the average volume of recent losses for a certain period of time. The ratio is later converted into a scale of 0 to 100.

On the scale, a value between 70 and 100 is perceived to be an overbought region, while a value from 30 down to 0 is the oversold region. You can use the scale to capitalize on long-term and short-term price movements to trade the market.

How To Use RSI Indicator In Crypto Trading

Now that you know what the RSI indicator is, the next step is to uncover how you can use it to trade the cryptocurrency market.

Below is a list of steps to use the RSI indicator for your trades.

  1. Identify the Market: The RSI can be used to trade any type of market — reversals, trending markets, range-bound markets, and many others. So, once you know the market you’re entering, the next step is to apply the RSI indicator.
  2. Calculate the RSI: Once you have your chart open, the next step is to calculate the RSI. You can do this over a range of timeframes, but it is usually calculated in a 14-day period. But you can change this timeframe depending on your preference or trading strategy.
  3. Interpret the RSI: On the RSI chart, determine the overbought region by checking the range of 70 and 100 and the oversold region by checking from 30 to 0.
  4. Confirm Signal Using Price Action: After checking the overbought and oversold conditions, you need to confirm the signal by analyzing the price action of the market. You can use the Moving Average indicator or Trendlines to do this to ensure the signal is valid.
  5. Make a Trading Decision: After confirming your signals and the RSI indicates an overbought condition, it may be a potential sell opportunity. And if the RSI indicates an oversold condition, it may be a buying opportunity.

Final Verdict

If you’re looking to start your crypto trading journey, the RSI is a powerful tool that’ll help you to properly analyze the market to foster trading decisions. And with constant practice and commitment, you can become an expert trader in no time. However, it’s crucial to combine the RSI indicator with other technical tools to make the best trading decisions.