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RSI Divergence: How Important Is It?

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The RSI is without a doubt one of the most common indicators, but most traders use this incorrectly, and they use it when they’re saying, ‘Hey, the RSI is up above 70. It’s up over here, it’s overbought, so I should be selling right here.’ If you were to do this and use this indicator that way, you would have been selling here and miss this entire rally. So, how do you actually use the RSI?

You use it for divergences so you can pair the price action relative to what the RSI is doing because the RSI is really showing you the strength of that asset. So, what you want to know is, ‘Hey, if price is going up and we’re having higher highs, is the RSI doing the same thing or is it doing the opposite, AKA diverging from what price is doing?’ In this case, this is exactly what happened in the 2021 rally for Bitcoin. We had the high right here in the RSI, and then we had lower highs the entire time: lower highs.

Meanwhile, price is making higher highs, meaning the strength is slowing down. You could even see that from price action kind of slumping over. And then what happened? We had a really big 40 plus percent correction right here. Same thing right here as well. We had price action sloping upwards, higher highs on a long time frame and on the daily, and you see the lower high, lower high, lower high on the RSI once again. The sell-off, then we created a big push up here, higher high, right here, but we had a lower high right here – AKA more divergence. And then what happened? Price sold off, and that was the actual high for Bitcoin in 2021.

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