RSI, developed by J. Welles Wilder, compares the average gain with the average loss over a period, usually 14 candles: RSI = 100 − 100 ÷ (1 + average gain ÷ average loss). It rises when up moves dominate and falls when down moves do. Traders use it for overbought and oversold readings, for divergences and as a trend filter, with 50 as the midline.
Example
Over the last 14 four-hour candles, ETH's average gain is $24 and its average loss $12. The ratio is 2, so RSI = 100 − 100 ÷ 3 ≈ 66.7. If price then makes a higher high while RSI peaks at 62 after an earlier peak of 72, that bearish divergence shows the new high came with weaker momentum.
Why it matters
RSI gives a quick read on momentum and on stretched moves, and divergences can warn that a trend is losing strength. Used as one condition in a written setup, it makes entries more consistent and easier to test.
Common mistake
Shorting just because RSI is above 70. In strong trends RSI can stay overbought for weeks while price keeps climbing. Treat extreme readings as context, and wait for price structure to confirm a turn.
Put it into practice
FAQ
- What are the best RSI settings?
- 14 periods with 70/30 levels is the standard. Some short-term traders use shorter periods or 80/20 levels; backtest any change before relying on it.
- What is RSI divergence?
- When price makes a new high or low that RSI does not confirm. It suggests momentum is fading, but it does not time the reversal.
- Does RSI work in crypto?
- It works the same way as in other markets, as a measure of momentum. Like any indicator, it needs rules around it and testing on the coins and timeframes you trade.