Complete Guide to the RSI Indicator: What Is It? How to Use It? What Are Its Drawbacks?

The RSI (Relative Strength Index) was proposed by Welles Wilder in 1978. It is an oscillating indicator that measures the momentum of price changes in an asset. Its core principle is to determine the market’s overbought or oversold conditions by calculating the ratio of average gains to average losses over a certain period. Its value is fixed within the range of 0-100:

• Above 70 is usually considered an overbought zone (implying that the price may pull back).
• Below 30 is considered an oversold zone (indicating that the price may rebound).

In the highly volatile cryptocurrency market, the role of the RSI is particularly prominent. It can transform abstract price momentum into visualized values, helping investors identify extreme points of short-term sentiment. For example, when Bitcoin experiences a continuous surge, an RSI breaking above 90 may indicate that a correction is imminent; whereas after a sharp decline, an RSI falling below 20 may trigger a rebound.

How to Use? Three Practical Tips for the Cryptocurrency Market

Basic Signals: Overbought, Oversold, and Crossovers

• Threshold Flexibility: The traditional stock market rule that RSI above 70 indicates overbought and below 30 indicates oversold needs to be dynamically adjusted in the cryptocurrency market. For example, in a strong trend market, it can be adjusted to above 80 for overbought and below 20 for oversold, to avoid exiting the market too early due to high volatility.
• Cycle Combination: It is recommended to combine multiple time cycles:
  • Daily RSI to determine short-term buy and sell points (e.g., buy when 6-day RSI breaks above 20);
  • Weekly RSI to analyze medium-term trends (bottom divergence indicates a reversal);
  • Monthly RSI to identify long-term opportunities.

Advanced Signals: Divergence and Pattern Recognition

• Top Divergence: When the coin price reaches a new high while the RSI does not reach a new high, it indicates a weakening of upward momentum (sell signal);
• Bottom Divergence: When the coin price reaches a new low while the RSI does not reach a new low, it suggests a weakening of downward momentum (buy signal).
• Pattern Assistance: If the RSI forms a W bottom in the oversold area or an M top in the overbought area, it can strengthen the reliability of the reversal signals.

Combination Strategy: Multi-Indicator Verification

Single RSI is prone to fail and needs to be combined with other tools:

• Bollinger Bands + RSI: When the price touches the lower Bollinger Band and RSI is below 30, the probability of a rebound from an oversold condition is high;
• Stochastic RSI: Calculates a stochastic value based on RSI to enhance sensitivity to short-term turning points, suitable for high-frequency trading.

What are the drawbacks of RSI? Four major limitations in the crypto context

1. One-sided market dullness: In strong trends (such as a bull market), RSI may remain in the overbought zone for an extended period, and mechanically applying the “sell at overbought” rule may miss the main upward wave; conversely, in a bear market, it may lead to premature bottom fishing.
2. Lagging divergence signals: Top/bottom divergences often require 2-3 occurrences to be valid, and most are verified post-factum, making it easy to miss the best timing in practice.
3. Parameter sensitivity imbalance:
   • Short periods (such as RSI 6): sensitive to price but prone to false signals;
   • Long periods (such as RSI 24): reliable signals but slow to react.
4. Specificity of the crypto market:
   • Sudden events (such as regulatory policies) causing sharp price fluctuations may render RSI ineffective;
   • Small market cap tokens are easily manipulated, leading to “false oversold/overbought” traps;
   • Reliance solely on price data, ignoring on-chain activities, project fundamentals, and other key factors.

Summary: Three Key Principles for Using RSI Effectively

RSI is a “navigation tool” for crypto trading, not “autopilot.” To realize its value, the following must be adhered to:

1. Dynamic Rules: Adjust overbought and oversold thresholds based on the volatility characteristics of the cryptocurrency (e.g., Bitcoin vs altcoins);
2. Multiple Validation: Combine with trading volume (a breakout above RSI 50 strengthens the signal), trend indicators (such as MACD), or fundamental analysis;
3. Cycle Adaptation: Use 1-hour RSI for short-term trades to capture swings, and weekly/monthly RSI for long-term trend identification.

Final reminder: In the highly volatile and low-regulation cryptocurrency market, RSI is more like a ruler with unclear markings — measuring risk is always more important than predicting prices.