RSI Indicator Quick Guide: A Complete Response Plan from Overbought/Oversold to Divergence Damping

If you want to learn crypto trading, the RSI (Relative Strength Index) is definitely an indispensable tool. As one of the most popular technical analysis indicators in the market, it can help you quickly judge whether the market is hot or cold, making it a must-know for many traders.

So how exactly do you use RSI? Why do divergence and dampening occur? What should you do when facing these situations? This article will guide you through RSI in the simplest way—let’s dive in.

What is RSI? One Number to See Through Bull and Bear Power

RSI (Relative Strength Indicator) is called 相對強弱指標, with a core function: by comparing recent upward and downward price movements, it measures which side is more dominant in the market.

Simply put, RSI tells you with a number: Is the market currently dominated by bulls or bears? Is it time to buy the dip or reduce positions to avoid risks?

Why is RSI so popular? Because it’s really simple. Unlike MACD, which requires complex calculations, RSI is just basic addition, subtraction, multiplication, and division—anyone can understand it. Plus, it can reflect market sentiment shifts in real-time, making it especially useful for timing buy and sell decisions.

How to Calculate RSI? Don’t Overthink It

The logic behind RSI calculation is straightforward, involving three steps:

Step 1: Choose a time period and calculate average gains and losses

Typically, a 14-day period is standard. Sum all upward movements over these 14 days and divide by 14 to get the “average upward movement”; do the same for downward movements to get the “average downward movement.”

Step 2: Calculate the Relative Strength (RS)

Divide the “average upward movement” by the “average downward movement” to get the RS value.

Step 3: Plug into the formula to get RSI

RSI = 100 - (100 ÷ (1 + RS))

The resulting RSI fluctuates between 0 and 100. The two most critical zones are:

• Overbought zone (RSI > 70): Market is overbought, possibly due for a correction
• Oversold zone (RSI < 30): Market is oversold, possibly due for a rebound

However, note that RSI is not a holy grail. Especially in strong trending markets, it can show dampening (discussed later), so decisions shouldn’t rely solely on RSI.

RSI Divergence: Watch Out When Price and Indicator Contradict

RSI divergence is one of the most important signals in technical analysis. It’s simple: when the price makes a new high or low, but RSI doesn’t follow, it often indicates a trend reversal.

Divergence comes in two types:

( Top divergence (bearish signal)
Price hits a new high, but RSI declines. For example, Bitcoin rises from $70,000 to $100,000 (new high), but RSI drops from 82 to 58. This suggests that although the price is rising, buying momentum is weakening, and the upward move may be losing steam. It’s time to consider reducing positions or exiting.

( Bottom divergence (bullish signal)
Price hits a new low, but RSI doesn’t make a new low; instead, it stabilizes or rises. This indicates that selling pressure is waning, and a bottom may be forming. You can consider gradually entering positions, waiting for a rebound.

Remember, divergence is powerful but not an absolute signal. It should be combined with other indicators and the overall environment. In strong uptrends or downtrends, divergence signals can persist for a long time before confirming, so patience is key.

RSI Dampening: Limitations When Market Is Extremely Biased

RSI dampening is one of the most frustrating issues with this indicator. Simply put: RSI gets stuck in overbought (>70) or oversold (<30) zones and stops reacting to price changes.

This often occurs in strong trending environments. For example, during a rapid rally, RSI may stay in overbought territory for a long time. Theoretically, this should be a sell signal, but the market ignores it, and prices keep soaring. That’s dampening.

How to deal with RSI dampening:

1. Don’t rush to reverse positions: Even if RSI is in overbought or oversold zones, wait for confirmation of trend reversal before acting.

2. Use multiple indicators: Combine RSI with moving averages, MACD, volume, etc., for more reliable signals.

3. Adjust parameters: If dampening occurs frequently, try changing the RSI period from 14 to 10 or 20 days to increase sensitivity.

4. Implement strict risk management: Dampening can lead to chasing highs or lows; set stop-losses to control risk.

Four Practical Rules for Using RSI

) 1. Use the 50 midline to compare bullish and bearish strength

• RSI > 50: Bulls are stronger, market is optimistic
• RSI < 50: Bears are stronger, market is pessimistic

The 50 line is a dividing line between bullish and bearish. When combined with trendlines and other indicators, it helps more accurately determine market direction.

) 2. Extreme zone market sentiment

• RSI > 80: Market is overbought, may face a correction
• RSI < 20: Market is oversold, may rebound

These signals reflect extreme market sentiment but can fail in strong trending markets. Always consider trend context.

3. Multi-period RSI improves accuracy

Don’t rely on just one RSI line. Set up short-term (6 days), mid-term (12 days), and long-term (24 days) RSI curves:

• W-shaped pattern (multiple lines below 50): Weakening bears, potential rebound
• M-shaped pattern (multiple lines above 50): Weakening bulls, possible reversal downward

4. Golden cross and death cross

• Golden cross: Short-term RSI crosses above long-term RSI, strong buy signal
• Death cross: Short-term RSI crosses below long-term RSI, strong sell signal

How to Set RSI Parameters? Adjust According to Your Trading Style

There’s no absolute standard for RSI parameters. The key is to tailor them to your trading cycle:

Day traders: Use 3-5 day periods for quick reactions to short-term swings.

Swing traders: Use 10-12 day periods for a balance of sensitivity and stability.

Long-term investors: Use 14-30 day periods to smooth out volatility and filter noise.

The adjustment principle is simple:

• Longer periods make RSI smoother and slower to react.
• Shorter periods make RSI more sensitive but prone to false signals.

There’s no “best” parameter—only the most suitable for your trading style.

Final Reminder

RSI is a useful tool, but don’t rely on it excessively. Markets are complex, and a single indicator is never enough.

Divergence and dampening remind us that technical analysis is just a tool to assist judgment, not a crystal ball. Truly successful traders use multiple indicators, combine trend analysis, and practice strict risk control. Mastering these three aspects will help you survive longer in the market.

Hope this article helps clarify how to use RSI. Next time you see an oversold signal, don’t rush in all at once—wait for confirmation that it’s truly a bottom rebound opportunity.