3 Things You Need to Know About The RSI (Relative Strength Index)
If you have any money in a cryptocurrency you know that the prices wildly oscillate on a daily basis.
What you may not know is that a lot of what determines the price of an individual coin is the momentum of daily trader activity.
A real understanding of the Relative Strength Index is helpful to combat bad trading decisions during the massive price fluctuations of cryptocurrencies. If you truly understand it you can successfully and profitably trade in the cryptocurrency market.
If you are not an advanced cryptocurrency trader, you might be wondering:
What is RSI and why is this important for me to understand?
6 Quick Facts about RSI
1.) RSI stands for Relative Strength Index
2.) It is a popular technical momentum indicator that is frequently used by cryptocurrency traders for technical analysis.
3.) J. Welles Wilder Jr. is the brainchild of this technical indicator
4.) Traders evaluate the Relative Strength Index to see if a coin is:
a.) overbought-too many people are buying it in short amount of time
b.) oversold-too many people are selling it in a short amount of time
5.) Traders use the RSI to make a decision
a.) to buy
b.) hold
c.) to sell
6.) It is important to understand so you can successfully and profitably trade in the volatile cryptocurrency market.
3 Basic Principles of the Relative Strength Index
1.) How is the Relative Strength Index (RSI) Measured?
The Relative Strength Index measures recent coin gains and losses traditionally over a short market snapshot of 14 days. The RSI assigns a value of 0 to 100 to an individual coin.
- A value of 0 indicates a cryptocurrency is oversold
- A value of 100 shows it’s overbought
If a coin is overbought or oversold, the values are:
- Under 30 (oversold) and over 70 (overbought)
- In a volatile environment, under 20 (oversold) and over 80 (overbought)
- Value of 50 the it is NOT oversold or overbought
Once the RSI crosses over these values, this generally indicates the beginning of a downtrend or an uptrend in price.
When the price of a coin hits an all-time high and has a significant rise in the RSI usually confirms the strength of an uptrend. This means the value broke through new levels of resistance and will successfully hold the price at a higher level of support.
To illustrate this indicator, on May 22nd, 2017, Bitcoin had an RSI of approximately 88, an increase in volume and started to reach an all-time high that day of $2,909.00 (USD). (caption for graph above)
Since this price breakout occurred last year, the price has reached record highs and has consistently held approximately at or above $2,000 (USD).
2.) How is the Relative Strength Index (RSI) useful in detecting Bullish and Bearish Divergence?
When the price of a coin and the RSI value do not directly correspond with each other in high and low values. Traders will see the divergence in values as a signal for a possible trend reversal.
- occurs when there are lower lows with the price of the coin
- but the RSI is showing a higher low
This shows that the market sentiment is bullish and the price of the coin is typically about to experience a reversal of momentum from a downtrend to an uptrend.
If other technical indicators also illustrate this trend, traders typically believe that this is a buying signal.
- occurs when the opposite happens
- price hits an all-time high
- but the RSI is hitting lower highs
This movement is shows a bearish market sentiment, and traders typically see this as a selling signal.
Advanced traders look for these patterns to capitalize on a price reversal trend opportunity.
Sophisticated cryptocurrency traders took advantage of Bullish Divergence in late December of 2017 with Ethereum. (this is a caption for the graph)
3.) Is it possible to exclusively use the Relative Strength Index (RSI) and have success trading cryptocurrencies?
It would not be considered a best practice only to use one technical indicator when making any trading decisions. The RSI is a popular technical indicator but it does not provide adequate optics for each individual factor that determines the price of a coin.
Advanced cryptocurrency traders who trade with momentum signals, typically use all these indicators together:
With the cryptocurrency market, there is not one clear way to predict the price. However, traders possessing a basic understanding of technical indicators tend to experience more success trading cryptocurrencies than traders without any technical knowledge.
If you enjoyed learning about this technical indicator and would like to learn more about other trading signals please check our blog as we launch https://hybridblock.io/ the worlds most robust cryptocurrency eco system
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May 31, 2018 at 11:04AM
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