What does overbought and oversold mean in crypto?

Overbought and oversold in crypto describe a coin whose price has moved unusually far and fast in one direction. Traders usually measure this with a momentum indicator called the Relative Strength Index, or RSI. The terms describe recent momentum, not whether a coin is cheap, expensive or fairly valued.

What is RSI in crypto?

RSI was created by J. Welles Wilder and introduced in his 1978 book New Concepts in Technical Trading Systems. It was designed for stocks and commodities, and crypto charting tools apply it the same way.

RSI compares the size of recent gains with the size of recent losses. Fidelity gives the formula as 100 minus 100 divided by (1 + RS), where RS is the average gain divided by the average loss over the lookback window. Wilder suggested 14 periods. On a daily chart that means 14 days, and on an hourly chart 14 hours. The result is a line between 0 and 100, usually shown in a panel below the price chart. For chart basics, see how to read a crypto chart.

What does it mean when crypto is overbought?

Traditionally, an RSI above 70 is called overbought. It means recent gains have been much larger than recent losses, so buying momentum has been strong. Some traders read it as a sign that a rally may be stretched.

Fidelity notes the thresholds can be adjusted. If an asset regularly reaches 70, some traders use 80 instead. Readings of 80 or 90 are rarer and indicate stronger momentum.

What does it mean when crypto is oversold?

An RSI below 30 is traditionally called oversold. Recent losses have outweighed recent gains, so selling pressure has been heavy. Some traders treat it as a sign a drop may be overdone.

Oversold does not mean a coin will bounce. A token can stay oversold while it keeps falling, especially during a broad sell-off or a crypto winter.

What are the limits of overbought and oversold signals?

Fidelity warns that in strong trends RSI can stay overbought or oversold for long stretches. It also observes that in uptrends RSI often holds between about 40 and 90, and in downtrends between about 10 and 60.

Traders also look for divergence, where price makes a new high or low that RSI does not confirm. Results also vary by platform. thinkorswim lets users swap Wilder's smoothing for simple, exponential or other averages, which changes the readings. One study cited on Wikipedia found RSI-based strategies were usually beaten by simply holding over longer periods.

RSI is one input that reflects only past price moves. It says nothing about a project's fundamentals, covered in how to research a crypto project.