How to Use Relative Strength Index(RSI) in Crypto Trading

Handy Tips / 28.04.2021

As a cryptocurrency investor, it is essential to leverage every tool available to maximize profits. Price evaluations can be a challenge to predict, particularly in the cryptocurrency market with over 9,000 cryptocurrencies. 

Relative Strength Index stands as one of those solutions a crypto trader needs, which operates as an indicator that measures the price change of an asset. The momentum oscillator is a brilliant formula from John Welles, who sought to introduce a visual representation of market shifts.

RSI Overview and How to Use the Indicator

The RSI technique was introduced way back in 1978 and oscillated between a reading of 0-100. Technically, a cryptocurrency asset is considered overbought when its RSI surpasses 70. If the same asset moves below 30, a trader can interpret the asset as oversold. 

An overbought cryptocurrency indicates that the specific coin is trading at an increased price, signaling the investor to avert initiating any trade at that point. On the other hand, an oversold crypto-asset suggests that an investor can buy the digital coin. Traders utilize this method to garner more coins and earn more profits before the cryptocurrency attains a logical value.

According to the RSI mechanism, a standard timeframe of 14 periods is used to achieve the best price results when computing the average gain or loss of an asset. Asides from the 30 to 70 range, other versions that exist on the RSI technique include 20 to 80 and 10 to 90. Novice investors use this formula when trying to make trades, as it provides a straightforward and reliable way to reanalyze their strategies. 

Types of RSI Signals

As an indicator, the RSI readings display various signals to a cryptocurrency trader:

Support and Resistance

The RSI method is an essential tool that can show a digital currency’s support and resistance level. Buying activities are usually higher at the support level, which keeps the crypto’s price from sloping downwards. Selling activities tend to be higher at the resistance level of a cryptocurrency, therefore maintaining its value from soaring further.

When displayed on a graph, RSI resistance and support levels are either horizontal lines or sloping trendlines. By analyzing the support and resistance level, investors can understand the trading patterns, an appropriate time to initiate a trade, and the right moment to halt any crypto trading activity.  

Trends

RSI indicators also give traders an avenue where they can estimate a cryptocurrency’s trend movement. The trend direction could be a bearish one which hopes to experience a price decline based on specific market considerations. As for a bullish market, the digital currency’s value is set to show an upward trend. 

For instance, In John Hayden’s book, the RSI of a bullish market is signaled at 66.66, while a bearish market is identified at the 33.33 marks. According to the book, the two figures are most suited for determining a bullish or a bearish market.

Double Top and Bottom Pattern

The double bottom pattern aims at foretelling the time a cryptocurrency’s trend will take a shift. RSI shows a double bottom trading signal by generating a buy and sell limit whenever a crypto asset’s price moves below the 30 marks elevating upwards. 

Another buy and sell limit can be generated if the same asset’s value shifts the 70 marks downwards(double top). In a double bottom signal, the asset’s pattern is demonstrated with two identical lows signaling the beginning of new selling pressure.

Divergence

RSI enables traders to receive a divergence signal showing the indicator’s status per the crypto’s value. It further means that an RSI can exhibit different findings when the digital currency achieves new highs and lows. As a result, it introduces two common categories of RSI divergences, including a bullish and bearish divergence.

A bearish divergence takes place when the asset’s value decreases as the RSI price surges. The divergence happens when the RSI value ascends as the asset’s price plunges on a bullish market. 

Strategies You Can Implement with RSI

RSI and Moving Average Cost Indicator

This technique matches the RSI overbought and oversold signal with the moving average cost indicator. Investors only buy or sell the cryptocurrency once they combine the duo techniques. 

After that, traders should maintain this position until they note a different signal coming from one indicator or see a divergence change on the chart. However, exiting a trade will require investors to monitor the candle until it closes under the lines of the moving average costs.

Relative Vigour Index and RSI

Here, an investor begins to trade after joining both RVI and RSI and receiving similar signals from the indicators. They then stay at that position up to the point one indicator shows a separate signal.

Price Action Trading and RSI

This strategy links the RSI overbought and oversold signals with any price indicating tools like candlesticks, trendlines, or chart patterns. Investors only access a trade with a price signal or an RSI signal. 

Conclusion 

RSI tactics make it easier to trade in the crypto market with minimal risks as it estimates the point at which a cryptocurrency is overbought and oversold. 

Furthermore, the momentum indicator also serves crypto traders with other functions such as determining the support and resistance level, trends, and divergence shifts in the trading network. As a bonus, combining RSI with other indicators boosts the investor’s shot of a profitable trade.

Adam is an outgoing young lad who likes adventures and discovering new things. Despite his boring life, he loves writing about cryptocurrencies and exploring what blockchain technology can do for the coming digital world where all adventures will be virtual.