How does the RSI indicator work for crypto trading?

Here we learn about Relative Strength Index and how RSI signals can help you form crypto trading strategies. Also an indicator we will be automating for you!

How does the RSI indicator work for crypto trading?

While many like to tell you cryptocurrency trading is complete guesswork and that every token you buy is just a roll of the dice, there are some helpful indicators & tools that can assist you when making predictions. Trading cryptocurrencies can very easily start to feel like an adventure as there are hundreds of different opportunities everyday, so it can be very useful to take a step back, stay patient and learn some of the popular indicators for crypto trading in order to give yourself an edge.

Recently, we discussed how calculating Simple Moving Averages can help you spot crypto trends and indicate possibly profitable trades for you. Another useful trading signal that can help you make better trades is the Relative Strength Index, also known as the RSI Indicator.

What is RSI indicator in cryptocurrency trading?

The Relative Strength Index is a technical analysis tool that works by looking at an asset's price changes and also the speed of its price movements on a cryptocurrency exchange. The main goal of this indicator is to allow you to predict if a coin or token has been overbought or oversold. This is a powerful tool to add to your repertoire if you can make the predictions correctly because you will essentially know when an asset is prone to price corrections, allowing you to sell or buy at ideal moments to make a profit.

How does it work?

RSI is measured on a scale of 1 to 100 and will generally be displayed on a chart with a wave-type pattern known as an oscillator. Luckily for us, we do not really need to understand the formula to benefit from its calculations - I am sure you have all seen many trading tools that simply display an asset's RSI for you automatically. That being said you should be aware of what is going on, so here is the formula:

RSI = 100 – 100 / (1 + RS)
RS = Average of X periods closes up / Average of X periods closes down
X = Usually will be 14 days, but can use any value of your choice.

So to calculate the RS, we have to be keeping track of an asset's average gains and average losses over a set period(usually 14 days). Not the easiest one to keep updated manually in our spreadsheets! One of the reasons why one of the milestones of our HODL dApp is to build automated trading indicators for you.

What we do need to understand is how to interpret the values. Traditionally speaking, any financial analyst will tell you that if the RSI is above 70 then the asset has probably been overbought and if the RSI is under 30 then that indicates that the asset is probably being oversold.

Overbought

The higher an asset's RSI goes above 70 then, the more overbought a coin or token is and that could mean the asset's price pullback could be much deeper. Once you spot these overbought conditions, it could be the ideal time for you to take profit on your position or maybe even close it entirely. Or if you are happy to be a risky trader, then you could always set up your short positions & try to make more profit on the way down.

Oversold

We can also use the RSI as a signal for when an asset's plummeting price might be reaching the point where it turns around. The lower the RSI goes below 30, the stronger the turnaround in price could be. If you are able to spot oversold conditions, then you will be in a good place to predict when a coin or token is going to go on a strong rally.

How can we apply it to our own crypto trading strategies?

RSI is a much loved indicator, because it is known to be very reliable and because the proof is in the charts. That being said you should not be sitting around waiting for the RSI to reach 0 or 100 - that will probably never happen! The 70 / 30 indicator rule is to help you make your own predictions, but as we already know crypto markets do not tend to follow the traditional rules.

Which means you may have to adapt the values you use as indicators of an asset being overbought or oversold, some traders for example like to use 80 and 20. Let's take a quick look at Saturn Classic's RSI together:

As we can see, over this period, Saturn Classic's RSI has never been above 70 nor has it ever dropped under 30. But that does not stop us using it to make an analysis, if we compare the RSI with what has happened trading wise this month, we can start to spot trends which may help us for the future. What we can take away is the following:

  • Points A - Once Saturn Classic's RSI was under 47, then we saw a rally period would always appear where there was a quick increase in buying & price.
  • Points B - If Saturn Classic's RSI reaches 53, then you may want to prepare for a sudden drop. Every time this has happened during the last month were points were the price reached 0.000059 ETC, but as we saw it never really could hold that position for very long at all.

Happy trading!

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