Relative Strength Index RSI Indicator for Crypto Trading

Traders can use RSI to predict the price behavior of a security. The RSI is displayed as an oscillator on a scale of zero to 100.

• A divergence between the price movement of an asset and the RSI oscillator could indicate a reversal of trends.
• In trending markets, the RSI setting can be even lower (2-6).
• If you are entering on an overbought/oversold signal, then you would buy/sell the currency pair when the price action exits the respective threshold on the RSI indicator.
• These indicators are developed using complex mathematical calculations.
• A bullish failure swing forms when RSI moves below 30 , bounces above 30, pulls back, holds above 30 and then breaks its prior high.
• The following chart illustrates the bearish swing rejection signal.

Once there are 14 periods of data available, the second calculation can be done. Its purpose is to smooth the results so that the RSI only nears 100 or zero in a strongly trending market.

Five reasons to keep a trading journal

The default period used to calculate the RSI is 14 days, but weeks, months and intraday data can also be used. Traders interested in day trading and swing trading can consider shorter periods to calculate the RSI. The two indicators are complementary and are often used together. While the MACD uses exponential moving averages, the RSI illustrates a graph of recent lows and highs.

The RSI look-back period should be set to 5 days and we are going to use the “50 level” for this strategy. The standard How to Use RSI Indicator look-back period is 14 but by using 5 days, we will be able to take advantage of increased momentum sooner.

If RSI above 50:

Welles Wilder Jr. and introduced in his seminal 1978 book, New Concepts in Technical Trading Systems.

• On the chart below, the RSI crosses over the overbought line on multiple occasions, producing a bearish signal.
• The Relative Strength Index is a well versed momentum based oscillator which is used to measure the speed as well as the change of directional price movements.
• The default period used to calculate the RSI is 14 days, but weeks, months and intraday data can also be used.
• A related concept focuses on trade signals and techniques that conform to the trend.
• Some trend following trading strategies use a high RSI level as a sign to keep buying.
• The price action increases afterwards and enters a bullish trend.

Dynamic momentum index is technical indicator that determines if a security is overbought or oversold and can be used to generate trading signals. As with any technical analysis​ study, https://www.bigshotrading.info/ the RSI can be used in conjunction with other tools, including the 200-day moving average​. In the above chart, Apple shares consolidated around the 200-day moving average in February.

Crypto Trading Strategy #1: Overbought and Oversold Signals on a Trending Market

In a downtrend, focus your sights on peaks above 70 followed by dips below this line. While using the midline cross-trading strategy, traders frequently use the ratios of 70/30, 50/50 or 60/40 as resistance and support in bullish or bearish trends. Due to the volatility of the stock and crypto markets, technical indicators provide a guide to plotting entry and exit points. Relative strength index is amomentum indicatorthat indicates overbought or oversold situations of an asset or cryptocurrency.

Its pullbacks tend to be short-lived before the trend resumes itself. The RSI is great to identify this “maximum pessimism” to time your entries. Now, you don’t want to do this across every market because not all markets behave the same. It’s in a long-term uptrend and the pullbacks tend to be short-lived before the trend resumes. Since you know that pullbacks are usually short-lived in the stock markets, you can use the RSI indicator to time the “extreme pessimism” of the pullback.

How to Use RSI Indicators to Find Entries and Exits in Crypto Trading

He started trading stocks around 1972 but wasn’t very successful. A few years later, Wilder compiled his trading research and experience into mathematical formulas and indicators that were later adopted by many traders around the world. The book was produced in only six months, and despite dating back to the 1970s, it is still a reference to many chartists and traders today.

I’ve done quite a bit of research on this and I found out that the stock market works really well for the RSI indicator. You can use the RSI indicator to improve your winning rate by trading with the trend. DTTW™ is proud to be the lead sponsor of TraderTV.LIVE™, the fastest-growing day trading channel on YouTube. The final RSI number is derived by subtracting this result from 100. As with all the other indicators, you don’t need to do these calculations by yourself.

Both indicators look at current closing prices relative to highs and lows over a stipulated look-back period. In addition, both indicators define overbought and oversold levels that traders use to identify buy and sell signals. In contrast, the RSI uses relative strength —or the average gains versus average losses of the previous 14-day period—to determine if an asset is overbought or oversold. In effect, both indicators are looking at previous highs and lows to determine current price momentum, but they focus on different relationships therein. The MACD indicator is very popular because of its simplicity and ease of application, as well as its graphical appeal.

• Imagine on a physical market someone is selling apples, and the salesman is raising the price.
• Given their similar objectives, shapes, and graphic ranges, it can be easy to confuse the RSI with the stochastic oscillator—and for good reason.
• For example, imagine the market closed higher seven out of the past 14 days with an average gain of 1%.
• However, using an indicator can still be beneficial because it takes out the guesswork and you can process the data faster.
• However, the reliability of this signal will depend in part on the overall context.

The Relative Strength Index can be a powerful tool, especially for day traders. Of course, you can’t overly rely on it as the result is never guaranteed. A prediction is only an analysis of the past and has little to do with the future. Setting Overbought and Oversold to 20 and 80 can increase the accuracy of RSI. You’ll start to notice fewer trade signals as the price lines are now extended.

Trading Strategies to Use the Relative Strength Index

If you’re gonna use 14-period, 15-period, it’s up to you. So you can use the RSI indicator to help you, to define thelong-term trendusing the technique that I just shared with you. You don’t have to guess if it’s a higher high or a higher lower, etc.