Imagine you’re walking into a casino, but instead of blackjack or roulette, every player is betting on whether Bitcoin will go up or down. This is the world of perpetual contracts, or perps—one of the dominant trading instruments in crypto. They allow traders to gain leveraged exposure without expiry dates, but the real magic (or mayhem) comes from funding rates and open interest—two mechanics that make this market unlike any other.

One of the best ways to understand the madness of perps is through a simple but powerful tool: the Relative Strength Index (RSI). Originally built for stocks, RSI works incredibly well in crypto because it captures the two forces that drive all trading: fear and greed.

Markets, especially leveraged ones, aren’t cold, rational machines. They’re a battle of human psychology, and RSI is like a thermometer for market emotion. Here’s how it works:

• Overbought RSI (>70): This means the market is “high on its own supply.” Too many traders have gone long, leverage is maxed out, and liquidations are likely.

• Oversold RSI (<30): This means traders are panicking. Shorts are getting overconfident, and a squeeze could be just around the corner.

Since perps don’t expire, momentum often overshoots in both directions, making these overbought/oversold signals even stronger than in traditional markets.

Now, here’s where RSI becomes deadly effective in crypto. The secret? Pair it with funding rates—the market’s built-in mechanism for balance.

• High RSI + High Positive Funding: Longs are overpaying to stay in their positions. This often leads to a squeeze lower.

• Low RSI + Deeply Negative Funding: Shorts are overcrowded, and a short squeeze could send prices higher.

To illustrate how traders use RSI effectively, consider a recent example highlighted by TraderPA. ETH/BTC has reached oversold conditions, with the Stoch RSI dropping to the same levels seen at the start of the 2021 bull market. As TraderPA points out in this tweet: "The Stoch RSI dropped to the same levels as at the start of the 2021 bull market. This is the time to buy."

Source for the image: TradingView

This chart shows how oversold signals, combined with broader market context, can identify strong entry points for traders.

2. Spot RSI Divergences with Open Interest Divergences make RSI even more reliable, especially when confirmed by open interest:

• Bearish Divergence: RSI makes lower highs while price makes higher highs → a sign that longs are running out of steam.

• Bullish Divergence: RSI makes higher lows while price makes lower lows → shorts are overplaying their hand, setting up a bounce.

RSI is incredibly powerful in range-bound markets, where price bounces between clear support and resistance levels. This is where RSI shines—giving traders sniper-level entry points.

However, RSI is less reliable in strong trends. If Bitcoin is surging, RSI can stay overbought for days—shorting just because RSI is 75? That’s a recipe for getting steamrolled. As Adam Mancini explains in this tweet, "Misunderstanding of the RSI is behind more beginner losses than anything else. 'Overbought' is never a sole reason to sell (the exact opposite - strong trends are defined by persistently overbought RSI). It must be confirmed with a major support and/or a topping pattern failing."

RSI isn’t magic, but it’s one of the best tools in a perp trader’s arsenal. It works because traders overreact. Because markets aren’t rational. Because leverage exists.

To trade successfully, stop thinking like a robot. Start thinking like a contrarian psychologist. Because as long as fear, greed, and leverage run crypto trading… RSI will remain one of the smartest ways to see the madness before it happens.

The Relative Strength Index (RSI) is a powerful tool that can help perpetual contract traders gauge market sentiment and identify potential trading opportunities. When combined with funding rates and open interest, RSI can provide even more valuable insights.

Take your trading to the next level with AI-powered insights. Join the waitlist now at 10x.trade and stay ahead of the market!

Imagine you’re walking into a casino, but instead of blackjack or roulette, every player is betting on whether Bitcoin will go up or down. This is the world of perpetual contracts, or perps—one of the dominant trading instruments in crypto. They allow traders to gain leveraged exposure without expiry dates, but the real magic (or mayhem) comes from funding rates and open interest—two mechanics that make this market unlike any other.

One of the best ways to understand the madness of perps is through a simple but powerful tool: the Relative Strength Index (RSI). Originally built for stocks, RSI works incredibly well in crypto because it captures the two forces that drive all trading: fear and greed.

Markets, especially leveraged ones, aren’t cold, rational machines. They’re a battle of human psychology, and RSI is like a thermometer for market emotion. Here’s how it works:

• Overbought RSI (>70): This means the market is “high on its own supply.” Too many traders have gone long, leverage is maxed out, and liquidations are likely.

• Oversold RSI (<30): This means traders are panicking. Shorts are getting overconfident, and a squeeze could be just around the corner.

Since perps don’t expire, momentum often overshoots in both directions, making these overbought/oversold signals even stronger than in traditional markets.

Now, here’s where RSI becomes deadly effective in crypto. The secret? Pair it with funding rates—the market’s built-in mechanism for balance.

• High RSI + High Positive Funding: Longs are overpaying to stay in their positions. This often leads to a squeeze lower.

• Low RSI + Deeply Negative Funding: Shorts are overcrowded, and a short squeeze could send prices higher.

To illustrate how traders use RSI effectively, consider a recent example highlighted by TraderPA. ETH/BTC has reached oversold conditions, with the Stoch RSI dropping to the same levels seen at the start of the 2021 bull market. As TraderPA points out in this tweet: "The Stoch RSI dropped to the same levels as at the start of the 2021 bull market. This is the time to buy."

Source for the image: TradingView

This chart shows how oversold signals, combined with broader market context, can identify strong entry points for traders.

2. Spot RSI Divergences with Open Interest Divergences make RSI even more reliable, especially when confirmed by open interest:

• Bearish Divergence: RSI makes lower highs while price makes higher highs → a sign that longs are running out of steam.

• Bullish Divergence: RSI makes higher lows while price makes lower lows → shorts are overplaying their hand, setting up a bounce.

RSI is incredibly powerful in range-bound markets, where price bounces between clear support and resistance levels. This is where RSI shines—giving traders sniper-level entry points.

However, RSI is less reliable in strong trends. If Bitcoin is surging, RSI can stay overbought for days—shorting just because RSI is 75? That’s a recipe for getting steamrolled. As Adam Mancini explains in this tweet, "Misunderstanding of the RSI is behind more beginner losses than anything else. 'Overbought' is never a sole reason to sell (the exact opposite - strong trends are defined by persistently overbought RSI). It must be confirmed with a major support and/or a topping pattern failing."

RSI isn’t magic, but it’s one of the best tools in a perp trader’s arsenal. It works because traders overreact. Because markets aren’t rational. Because leverage exists.

To trade successfully, stop thinking like a robot. Start thinking like a contrarian psychologist. Because as long as fear, greed, and leverage run crypto trading… RSI will remain one of the smartest ways to see the madness before it happens.

The Relative Strength Index (RSI) is a powerful tool that can help perpetual contract traders gauge market sentiment and identify potential trading opportunities. When combined with funding rates and open interest, RSI can provide even more valuable insights.

Take your trading to the next level with AI-powered insights. Join the waitlist now at 10x.trade and stay ahead of the market!