Lesson Seven

Yibo says that the valuable knowledge shared by the crypto host is worth saving and reviewing later.

Hello everyone! Today, we won't discuss complicated theories. Let's keep it simple and talk about — how to use the RSI indicator to judge the strength of the digital currency market, helping you avoid pitfalls and seize opportunities in trading.

First, let me ask you: Sometimes, when the price of a coin rises happily, you buy in and it pulls back; when it drops sharply, you sell and it rebounds? Actually, it's not bad luck, mainly because you haven't figured out the market's “buying and selling momentum.” The RSI indicator, simply put, is a tool to measure this momentum. Its full name is Relative Strength Index, and the calculated value ranges from 0 to 100, which is easy to understand.

Let's start with the basics: how to interpret overbought and oversold signals on RSI? The standard is above 70 for “overbought,” meaning too many buyers, rapid price increase, likely to pull back; below 30 for “oversold,” meaning too many sellers, excessive decline, possibly a rebound. But because cryptocurrency volatility is very high, some adjust the standard to 80/20. For altcoins, which are more volatile, it's recommended to use a 21-day period with thresholds at 75/25. For stablecoins, just stick to the 14-day standard.

There's also a very useful signal called “divergence,” which is the core value of RSI. If the price hits a new high but RSI doesn't follow, it's called “top divergence,” indicating a potential decline. Conversely, if the price hits a new low but RSI doesn't, it's “bottom divergence,” suggesting a likely rise. For example, Bitcoin previously hit a new high, but RSI was trending downward, and it indeed pulled back afterward—that's the power of divergence. Additionally, when RSI exceeds 90 or drops below 10, the market is in an extreme state, often signaling a major trend reversal, so be alert when encountering these conditions.

RSI typically has three lines based on 6-day, 12-day, and 24-day periods, each used differently. The 6-day line reacts fastest, suitable for short-term trading but prone to false signals; the 12-day line is moderate, good for medium-term trends; the 24-day line is the most stable, helping to identify major cycle turning points. For example, in January 2023, Bitcoin's 24-day RSI rebounded from oversold territory and broke above 30, leading to a weekly rebound—showing the significance of long-term signals. These lines can “cross”: when the 6-day crosses above the 12-day, it's a “golden cross,” indicating a buy signal; crossing below is a “death cross,” suggesting a sell. If all three lines move in the same direction, the trend is particularly strong.

Next, let's discuss how to use RSI to find opportunities during intraday trading. Day trading requires real-time monitoring: when RSI exceeds 70, be cautious of a pullback; when it drops below 30, watch for a rebound. Short-term traders can set the period to less than 7 days for quicker response; medium to long-term traders can use 14-21 days to reduce noise from short-term fluctuations. But don't rely solely on RSI; combine it with other tools for confirmation: for example, look at price patterns for divergence signals; check trading volume—signals are more reliable when volume increases; also consider support and resistance levels—buy at support with bottom divergence, sell at resistance with top divergence.

For example, if RSI breaks above 70 while the price is still rising rapidly but volume increases and the price stops climbing, don't chase the move—be alert for a pullback. If RSI breaks below 30, and the price keeps falling with bottom divergence, there's a high chance of rebound, so consider entering with a small position.

There are also many precautions when using RSI to avoid false signals. In ranging markets, RSI is prone to errors and should be used with moving averages, Bollinger Bands, and other indicators. For instance, if the price is above the moving average and RSI is overbought, consider shorting; if below, consider buying. Also, signals on small timeframes are less reliable—if the 1-hour chart shows overbought, check the 4-hour or daily RSI to confirm, otherwise risk misjudging. During black swan events with extreme market volatility, RSI may become invalid; in such cases, avoid relying solely on it and wait for the market to stabilize.

Position management is also crucial. When RSI enters oversold territory, don't allocate more than 15% of your total funds for initial entry; wait for the indicator to recover before adding positions. When overbought, use leverage no more than 3x; for oversold conditions, no more than 5x. Don't expose yourself to excessive risk. After achieving a 5% profit, move your stop-loss to your cost basis so that even if there's a pullback, you won't lose your principal.

Finally, a learning path for beginners: first, understand the basic concepts of RSI, including overbought, oversold, and divergence signals; then learn to combine it with other indicators like MACD and Bollinger Bands; next, backtest with historical data to see which parameters work best for different coins; finally, practice with simulated trading to gain real experience.

In summary, RSI is easy to use. The core is to watch for overbought, oversold, divergence, and the three-line crossovers, combined with volume and support/resistance levels for confirmation. Manage your positions and stop-losses carefully, and it can help you more accurately judge market strength. But remember, no indicator is foolproof. Always respect the market and trade rationally. I hope today's sharing helps everyone. Wishing you successful trading!