RSI Indicator for Crypto Trading: How to Actually Use It

If you ask me which indicator I always use then I’d say the RSI indicator for crypto trading is the most used indicator. Now wait, don’t get fooled by it. The most used indicator is the RSI indicator for crypto trading doesn’t mean it’s easy! The matter of fact it is one of the biggest misunderstood indicator out there. 

Traditionally a trader usually thinks RSI topping 70, and then it means the price now will reverse and start to fall. But price kept going up and up for hours or even days, keeping the RSI overbought condition the same. On the other hand a trader might see RSI is at 30 and assume that’s it, price is about to bounce upside. But the price kept going down for hours or days by keeping oversold. 

Those are the scenarios where traders miss the fakeout scenarios. For my beginners and new traders out there. Let’s see what RSI is. Relative strength index or on short RSI is an indicator that helps us to measure the momentum or trend of a chart. This indicator is a scale and it has reading starting from 0 to 100.  RSI indicator helps to find the divergence , momentum and whether the trend is going to gain or lose the momentum. And perhaps the take home skill from RSI is not about when to buy or sell. How a trader can read the RSI in certain market conditions and certain price action,is the main thing here. 

I’ve seen many traders and they blindly press the buy button when the RSI scale is oversold. And they also press the sell button when RSI is overbought. 

In this article I will help you to guide and make you understand the real skills needed to use RSI indicator for crypto trading. Why you need to understand the market’s current trend. The key levels in the chart along with price and the candles structure correlation with RSI indicator and so on.

What RSI indicator Actually Measures in the Chart

RSI indicator or Relative Strength Index is usually an indicator which we use to calculate or understand the momentum of the chart. There is a saying, which is, trend is your friend. And momentum, trend is usually found with the help of this tool. It has a scale which starts for zero and ends with 100. Within this range it measures about how fast or slow the price action is moving. A thing to remember is that it will not measure the price. It will evaluate and calculate the strength of the price action and speed of it. Whenever the buyers are in control and buying pressure increases in recent candles, RSI rises. On the flip side when the sellers are in control and selling pressure increases and then RSI goes down. 

It’s the overall basic idea or info you need to know if you are starting your trading journey now. This RSI indicator, practice and try to understand it better. Learning when to trust it and when not , that is the biggest skill for every beginner trader. 

RSI Indicator Trap to Avoid

Yes there is a RSI trap to avoid and now we are going to talk about it so that you all can stay safe from that trick. And upgrade yourself with the new skills. So yeah, this has saved me from tons of frustration. Keep in mind that RSI scale overbought over 70 or below 30 oversold condition is not your buy or sell signal. The strength is shown here in that scale. However, RSI is not giving you guarantee of the reversals of the current trend or structure of the chart. 

And in between this ups and down movement. I will give you another example. When the trend ,say for example, is solid bullish or bearish and the strength of the trend is overall good. Then the overbought or oversold condition can stay constant for hours, days or even weeks for a long time straight. 

So the trap is ,if you keep buying when it is oversold for a long time on the RSI scale. Or keep selling when RSI is overbought then you will lose money. That is the trickery and trap of this indicator. You will think, yes this is when the trend reversals coming, but it will not come. 

So when does RSI work overall ok? Hmm let me spill some of the data based thesis. Yes and nothing is the absolute truth in trading. But overall when the market is in range. And in rangy market territory RSI usually comes in handy. And what I mean range by is. If you are able to draw a support and resistance area and price kept visiting that zone , this is the time when you can see good RSI reading. And to discover this ,traders have to go through years of mistakes and rectification in their strategy. But now you know the escape route of RSI trap. Likewise, one of the biggest mistake for a trader is when they apply this range RSI strategy into the strong trendy market condition.

RSI Indicator Divergence — The Signal Most Beginners Miss Completely

Ok, now we’re diving deeper into this topic. Divergent, what is it?  When the price movements in the chart and RSI is not moving in the same direction, this condition is usually identified as divergence. For instance when price is making lower low or higher high. But RSI is not showing accordingly in its reading. It is failing to do so. Then this is the divergence and it indicates that current momentum is losing and started to become weak. There are 2 types of RSI we see.

Bullish divergence: This happens when price is making lower low but the RSI is making higher low in parallel at the same time. What does it tell us? It tells us that the falling of price won’t continue because the trend or momentum is getting weaker. Buyers are taking control from the sellers. And eventually we might see a bounce or reversal incoming in the price chart.

Bearish divergence: Bearish divergence is exactly opposite of the bullish one we discussed above. Like ,when price make higher high and the RSI is making a lower high in bearish divergence condition. On the surface level piece looks normal and has a kind of strong movement on the chart. But this divergence tells you that momentum for the trend is getting weaker. Likewise , expect a pullback from the strong trends.

By observing the divergence reading a trader can observe the actual market momentum or changes. Instead of the traditional overbought or oversold reading from the RSI .

Settings of decent RSI

The default settings work fine as usual. But in your group we use a certain RSI setting that helps us a lot to catch the reading that it provides. 

Firstly, if you go to settings on the RSI,then first go to inputs. From inputs, select RSI length as 7. Keep the source close, and check in the calculate divergence box. Then on the second part. Smoothing section, keep the type SMA, length 3 and check in the box for ( wait for timeframe lose). You can style the colors based on your choice but we also have a sample given in our discord groups. 

Now comes the most important settings. The scale of the RSI. Select RSI upper band in 80, RSI middle band 50 and RSI lower band at 22. Make sure on the style section you have check box in for – Regular Bullish, Regular Bullish label, Regular bearish, Regular Bearish label. 

Now you are all set to go. 

It is recommended not to Use RSI indicator Alone

Yes, never use rsi indicator alone, and you must pair it with other indicator to get solid or realistic confirmation. Usually most of the traders pair RSI reading with MACD. Because pairing RSI with MACD indicator gives real value added information. Also you can add volume spike readings along with RSI indicator for crypto trading.

For instance, if you see a huge spike on the buying side in volume reading in a downtrend on RSI ,it is usually an indication that price is soon getting reversals. But if the oversold is like staying quiet and steady and no volume has spiked that will not tell us that the price is getting reversal anytime soon . RSI with a MACD pair will tell you whether the market is actually in trend or in range condition. You will not get confused by range for a trend and making bad trading decisions which eventually cost you loose money on trade. 

Besides the volume and MACD, neither of them are contradictory with the RSI indicator. They do the same job of finding momentum but on another point of view. From another point of angle. MACD cross generally indicates the trend reversal and starting of a new one along with RSI.

RSI Mistakes To Avoid

Ok, now let’s talk about some genuine mistakes of using the RSI indicator. Mistakes that are costing money everyday from the traders. 

• Trading every single overbought/oversold touch. I think I’ve covered this issue above in this article. It is a really wrong and bad strategy to trade on oversold and overbought candles. Only when the trend is solid and directional than range bound. Then you can execute your bias from this indicator, other than not.
  
• Ignoring the broader trend context entirely. If you did not see higher time frame analysis and you don’t have any idea what current trend in the market is. Then you will lose money by trading or making decisions based on the RSI reading. For instance, a trend is bullish or mega bullish but you are having corrections now. But you have taken that corrective phase RSI as downtrend. Then what will happen? Guess. Yes the trend will go to the bullish side and it will liquidate or eat up your sl order before doing so.
  
• Using RSI on illiquid, low-cap coins. Yes, this one is important. Don’t use the bias of RSI indicator for low liquidity or low market cap coins in crypto trading. Simple because their readings will not provide you the information you need for trade. Use RSI indicator in high cap coins like Bitcoin,Solana etc. Because RSI indicator works better for higher cap coins and gives actual usable data or information.
  
• Taking signals with zero confirmation. Without the confirmation of the trend direction from another way or using other indicators, don’t use the signal to trade. Wrong trend direction will give you a negative balance on money.
  
• Using the wrong timeframe for your actual trading style.  Ok, so all the info is right. The RSI , MACD, volume profile and EMA’s all gave you the right trend direction and perfect momentum. But you read that wrong and went against it. You will also lose money in trading. So it is important to understand and practice to read the readings and signals from the indicator properly. 

So if you can be disciplined and be safely aware of these money losing mistakes. I can tell that you are well ahead in this trading journey. 

Final Thoughts

There comes the completion of your quest. And now you know how to use and be profitable in your trading journey with the RSI indicator for crypto trading. Always keep in mind that it is not a magic button or magic buy sale signal indicator.

It has a certain purpose to serve and it will serve its purpose. Your job only will be to anticipate it accordingly. Utilize that information. And keep them in your stride. Use the 80 upper band  and 22 lower band as I’ve described you above. Try to merge it with another indicator like MACD and/or volume profile indicator. Learn how to read them properly.

Find out your mistakes where you are instead then. How not to lose money by identifying the key points for losing money. And not repeating them again. Try to respect the bigger trend and ride with it instead of a short trend. Use them on big can coins instead of low caps coins. Check for divergence. Read the divergence properly. Be ready to anticipate what to do when the deciding time comes. This RSI indicator for crypto trading will be one of your favorite trading tools. And I hope you will enjoy your crypto journey with it.