March 28, 2018

What Is The RSI (Relative Strength Index) Indicator In Cryptocurrency Trading?

The Relative Strength Index is a technical trading indicator and is classified as a momentum indicator. Also called the RSI, it is one of the most well known and popular technical analysis tools due to its simple and clear outputs. In this guide we will show you how to use it to analyze price movements in the Cryptocurrency markets.

The Basics to RSI

The RSI is based on a 14 day time limit usually although this can be altered. The RSI is measured on a scale of 0-100 with overbought assets between 70-100 and oversold assets between 0-30. As the RSI index moves between oversold to overbought, or vice versa it can be seen as indicating a trend but in general at 50 it is considered to have no trend.

The RSI is calculated by calculating the momentum of the ratio of higher closes to lower closes – so the more the stock moves up – the more positive the RSI.

bitcoincash12

If you look at the Bitcoin price chart above you can see the 14 day RSI and two periods over the full 3 month time period that the chart shows. The first period is where the RSI indicator is showing the bitcoin price to be overbought as it is generally above the 70 mark.  The second period is showing the Bitcoin price to be oversold as the indicator is breaching oversold territory and is therefore indicating a buy signal.

This indicator is able to predict these price movements because it helps predict trend reversals. For example, if a coin is being overbought, the price is most likely at a peak. The RSI is going to help point this out so that you can understand a reversal is about to happen. Obviously it is not going to be perfect, but it can be extremely help to help make decisions about buying/selling coins.

If the RSI is under 30, that indicates that the currency is probably being oversold, and if the RSI is over 70, it’s probably being overbought. This indications are useful because it helps you predict trend reversals. If a coin’s RSI dips below 30 on the RSI, that might be a good time to buy a coin because the price could soon be rising. On the other hand, if a coin’s RSI moves above 70, you might want to sell your currency and get the most on your crypto investment before the value goes back down again.

The RSI numbers are just indicators, and while they are helpful in making predictions, they aren’t a perfect forecast. It doesn’t necessarily mean that you should buy or sell if the currency is traded in frequencies below 30 or above 70. In fact, some people adjust the overbuy/oversell threshold to 80 and 20 to avoid misreading market trends.

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Wilson

Wilson is a 3x Startup Entrepreneur. He is passionate about the cryptocurrency space. You can catch him tweeting about cryptocurrency often @itswilson8

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