5 min reading
Crypto investment has so many strategies. Let’s get to know one of the important tools for technical analysis, Relative Strength Index (RSI).
What is Relative Strength Index (RSI)?
What is RSI?
The Relative Strength Index (RSI) is a technical analysis tool and oscillator in the cryptocurrency sector that displays the strength of the price trend. It shows the intensity of the asset’s purchasing and selling and is regarded as one of the most effective analytical techniques for assessing the status of cryptocurrency. Traders who apply the indicator correctly may conduct a complete examination of the trend and use it to make credible forecasts of price changes.
That is, it is most successful when the market is reasonably tranquil. It displays a broken curve with points ranging from 0 to 100. According to this, there are some crucial points such as:
- 70 to 100 points that the market is overbought and that a price decline is possible;
- 0-30 indicates that the market is oversold and that a price increase is likely;
- The middle zone is between 30 and 70. It means not to enter the deal since it could be dangerous with potential losses. Thus, opening orders when the chart exits the crucial zones 0-30 and 70-100 is the best option.
The RSI application is based on the usage of its patterns and models in the development of trading strategies. The tool displays the same values as the cryptocurrency price chart. Their interpretations, however, diverge. Traders pay close attention to the correlation or difference between the quotes and the data displayed by the RSI cryptocurrency indicator.
How to use it on bit4you?
However, the bit4you trading platform provides its users with all existing technical indicators. You can easily predict possible price movements and market trends by using different instruments. For example, after selecting an asset on bit4you, you will see a chart displaying how the price fluctuates over time. There is also a “Indicators” option above where you may locate RSI.
The indicator has 14 days and levels of 30 and 70 at first. If you wish to update them, you must first click on the edit button. Levels are occasionally modified for such combinations as 20 and 80, 40 and 80 for a bullish trend, and 20 and 60 for a bearish trend. You can also select a period ranging from 5 to 25. Keep in mind that when the number of periods reduces, the indicator becomes more sensitive to price changes. As a result, it will emit a large number of signals, some of which may be false. If you set the value 25, for example, the curve will become smooth, nearly without oscillations. Experts recommend setting the number of periods higher for a shorter time frame and lower for a longer one.
Connect the RSI chart’s tops and troughs and trade on the trend line’s breakout. Connect three or more points on the RSI line as it climbs to form an RSI uptrend line. Connecting three or more dots on the RSI line as it decreases creates a downtrend line. Indeed, RSI trendline breakthrough indicates a price continuation or reversal. Remember that an RSI trendline breakout frequently precedes a price chart trendline breakout, providing warning and an early opportunity to trade.
The RSI indicator formula consists of two equations. With the first equation, we will obtain the initial Relative Strength (RS) value, which is the ratio of average “Up Close” to average “Down Close” values across “N” periods. We use the formula below to get the data:
RS = Average Up Close price / (Average Down Close price) for a given period.
The actual RSI value is calculated by indexing the indicator to 100 using the following formula:
RSI = 100 – 100 / (1 + RS).
In conclusion, the RSI indicator helps to determine the direction and strength of the trend, as well as its possible change and buying/selling signals. As a result, the indicator is suitable for both novice and advanced traders. By the way, we recommend you test how RSI works on Demo mode first. As a result, you will have a thorough understanding of how to apply this indication while avoiding the risks associated with real-world trading. Furthermore, RSI works well in conjunction with Bollinger Bands.