Relative Strength Index Meaning

What is the Relative Strength Index?

The Relative Strength Index (RSI) is a technical analysis tool used to measure the velocity and magnitude of an asset’s price movement. It is computed based on a cryptocurrency’s change in price and how fast the change occurs. The RSI is expressed on a scale of 0 to 100.

The RSI determines whether a cryptocurrency asset is overbought or oversold, which could identify a potential price reversal. If a crypto is overbought, it implies that the asset s prone to a price correction (or price drop) in the short term. An oversold crypto is more likely to rally (increase in price) in the short term. A cryptocurrency is considered overbought when the RSI is above 70, and oversold when the RSI is below 30. 

How the RSI Works

The RSI is calculated by dividing the average price gain over 14 periods (either on an hourly or daily basis) by its average loss. The data is then plotted on the 0-100 scale.

A reading between  50 and 70 is considered a rising trend. It shows that the market trend is strengthening and points to a bullish divergence. In a market exhibiting a bullish divergence, the RSI indicator continues to rise while the asset’s price continually declines. This indicates the increased buying pressure despite the asset’s price decline.

A reading crossing below the centerline moving towards the 30 mark signals a falling trend. It indicates a decrease in the strength of the market trend and signals a bearish divergence. A bearish signal has a declining RSI and a rising asset price. This reflects an increasing selling pressure despite an increase in asset price.

Generally, traders can use the RSI momentum oscillator to verify trends and potential trend reversals and swings. It can identify when to buy and sell a cryptocurrency asset, as well as forecast an asset’s price behavior.