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9/6/2022

Bitcoin RSI

The Bitcoin relative strength index (RSI) is a momentum indicator used in technical crypto analysis. Bitcoin RSI measures the speed and magnitude of a BTC recent price changes to evaluate overvalued or undervalued conditions in the price of that Bitcoin.

Bitcoin RSI | CryptoPlotly
Bitcoin RSI

The Bitcoin RSI is displayed as an oscillator (a line graph) on a scale of zero to 100. The indicator was developed by J. Welles Wilder Jr. and introduced in his seminal 1978 book, New Concepts in Technical Trading Systems.

The Bitcoin RSI can do more than point to overbought and oversold BTCs. It can also indicate securities that may be primed for a trend reversal or corrective pullback in price. It can signal when to buy and sell Bitcoin. Traditionally, an RSI reading of 70 or above indicates an overbought situation. A reading of 30 or below indicates an oversold condition.

How the Bitcoin Relative Strength Index (RSI) Works

As a momentum indicator, the relative strength index compares aBitcoin's strength on days when prices go up to its strength on days when prices go down. Relating the result of this comparison to price action can give crypto traders an idea of how BTCmay perform. The RSI, used in conjunction with other technical indicators, can help crypto traders make better-informed trading decisions.

Calculating Bitcoin RSI

The average gain or loss used in this calculation is the average percentage gain or loss during a look-back period. The formula uses a positive value for the average loss. Periods with BTC price losses are counted as zero in the calculations of average gain. Periods with BTCprice increases are counted as zero in the calculations of average loss.

The standard number of periods used to calculate the initial BitcoinRSI value is 14. For example, imagine the market closed higher seven out of the past 14 days with an average gain of 1%. The remaining seven days all closed lower with an average loss of -0.8%.

Once there are 14 periods of data available, the second calculation can be done. Its purpose is to smooth the results so that the BitcoinRSI only nears 100 or zero in a strongly trending market.

Plotting Bitcoin RSI

After the Bitcoin RSI is calculated, the RSI indicator can be plotted beneath an Bitcoin's price chart, as shown below. The Bitcoin RSI will rise as the number and size of up days increase. It will fall as the number and size of down days increase.

As you can see in the above chart, the RSI indicator can stay in the overbought region for extended periods while the BTC is in an uptrend. The indicator may also remain in oversold territory for a long time when the BTC is in a downtrend. This can be confusing for new crypto analysts, but learning to use the indicator within the context of the prevailing trend will clarify these issues.

Why Is Bitcoin RSI Chart Important?

  • Crypto traders can use Bitcoin RSI to predict the price behavior of BTC.
  • It can help crypto traders validate trends and trend reversals.
  • It can point to overbought and oversold coins.
  • It can provide short-term Bitcoin traders with buy and sell signals.

Using Bitcoin RSI Chart With Trends

Modify Bitcoin RSI Chart Levels to Fit Trends

The primary trend of Bitcoin is important to know to properly understand Bitcoin RSI. For example, well-known crypto technician proposed that an oversold reading by the Bitcoin RSI in an uptrend is probably much higher than 30. Likewise, an overbought reading during a downtrend is much lower than 70.

As you can see in the following chart, during a downtrend, the BitcoinRSI peaks near 50 rather than 70. This could be seen by crypto traders as more reliably signaling bearish conditions.

Many crypto investors create a horizontal trendline between the levels of 30 and 70 when a strong trend is in place to better identify the overall trend and extremes.

On the other hand, modifying overbought or oversold Bitcoin RSI levels when the price of BTC is in a long-term horizontal channel or trading range (rather than a strong upward or downward trend) is usually unnecessary.

The relative strength indicator is not as reliable in trending crypto markets as it is in trading ranges. In fact, most crypto traders understand that the signals given by the RSI in strong upward or downward trends often can be false.

Use Buy and Sell Signals That Fit Trends

A related concept focuses on trade signals and techniques that conform to the trend. In other words, using bullish signals primarily when the price is in a bullish trend and bearish signals primarily when Bitcoinis in a bearish trend may help crypto traders to avoid the false alarms that the Bitcoin RSI can generate in trending crypto markets.

Overbought or Oversold Bitcoin

Generally, when the Bitcoin RSI indicator crosses 30 on the BitcoinRSI, it is a bullish sign and when it crosses 70, it is a bearish sign. Put another way, one can interpret that Bitcoin RSI values of 70 or above indicate that BTC is becoming overbought or overvalued. It may be primed for a trend reversal or corrective price pullback. An Bitcoin RSI reading of 30 or below indicates an oversold or undervalued condition.

Overbought refers to Bitcoin that trades at a price level above its true (or intrinsic) value. That means that Bitcoin's priced above where it should be, according to practitioners of either technical or fundamental crypto analysis. Crypto traders who see indications thatBitcoin is overbought may expect a price correction or trend reversal. Therefore, they may sell BTC.

The same idea applies to Bitcoin that technical indicators such as the relative strength index highlight as oversold. It can be seen as trading at a lower price than it should. Crypto traders watching for just such an indication might expect a price correction or trend reversal and buy BTC.

Interpretation of Bitcoin RSI and Bitcoin RSI Ranges

During trends, the Bitcoin RSI readings may fall into a band or range. During an uptrend, the Bitcoin RSI tends to stay above 30 and should frequently hit 70. During a downtrend, it is rare to see the BitcoinRSI exceed 70. In fact, the indicator frequently hits 30 or below.

These guidelines can help crypto traders determine Bitcoin trend strength and spot potential reversals. For example, if the Bitcoin RSI can't reach 70 on a number of consecutive price swings during an uptrend, but then drops below 30, the trend has weakened and could be reversing lower.

The opposite is true for a downtrend. If the downtrend is unable to reach 30 or below and then rallies above 70, that downtrend has weakened and could be reversing to the upside. Trend lines and moving averages are helpful crypto technical tools to include when using theBitcoin RSI Chart in this way.

Example of Bitcoin RSI Divergences

An Bitcoin RSI divergence occurs when price moves in the opposite direction of the Bitcoin RSI. In other words, a chart might display a change in momentum before a corresponding change in price.

A bullish divergence occurs when the Bitcoin RSI displays an oversold reading followed by a higher low that appears with lower lows in the price. This may indicate rising bullish momentum, and a break above oversold territory could be used to trigger a new long position.

A bearish divergence occurs when the Bitcoin RSI creates an overbought reading followed by a lower high that appears with higher highs on the price.

As you can see in the following chart, a bullish divergence was identified when the Bitcoin RSI formed higher lows as the price formed lower lows. This was a valid signal, but divergences can be rare when a stock is in a stable long-term trend. Using flexible oversold or overbought readings will help identify more potential signals.

Example of Positive-Negative Bitcoin RSI Reversals

An additional Bitcoin price-RSI relationship that crypto traders look for is positive and negative Bitcoin RSI reversals. A positive BitcoinRSI reversal may take place once the RSI reaches a low that is lower than its previous low at the same time that a Bitcoin's price reaches a low that is higher than its previous low price. Crypto traders would consider this formation a bullish sign and a buy signal.

Conversely, a negative Bitcoin RSI reversal may take place once theBitcoin RSI reaches a high that is higher that its previous high at the same time that a Bitcoin's price reaches a lower high. This formation would be a bearish sign and a sell signal.

Example of Bitcoin RSI Swing Rejections

Another crypto trading technique examines Bitcoin RSI behavior when it is reemerging from overbought or oversold territory. This signal is called a bullish swing rejection and has four parts:

  • The Bitcoin RSI falls into oversold territory.
  • The Bitcoin RSI crosses back above 30.
  • The Bitcoin RSI forms another dip without crossing back into oversold territory.
  • The Bitcoin RSI then breaks its most recent high.

As you can see in the following Bitcoin RSI, the Bitcoin RSI indicator was oversold, broke up through 30, and formed the rejection low that triggered the signal when it bounced higher. Using theBitcoin RSI in this way is very similar to drawing trend lines on a price Bitcoin RSI.

There is a bearish version of the swing rejection signal that is a mirror image of the bullish version. A bearish swing rejection also has four parts:

  • The Bitcoin RSI rises into overbought territory.
  • The Bitcoin RSI crosses back below 70.
  • The Bitcoin RSI forms another high without crossing back into overbought territory.
  • The Bitcoin RSI then breaks its most recent low.

The following Bitcoin RSI illustrates the bearish swing rejection signal. As with most trading techniques, this signal will be most reliable when it conforms to the prevailing long-term trend. Bearish signals during downward trends are less likely to generate false alarms.