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What is RSI?
RSI or Relative Strength Index is a technical indicator that analyzes how quickly prices change. Rather than a single price point, it employs averages across numerous days. It, on the other hand, employs the ratio method in the same way that momentum does.
Using Crypto RSI for trading
The Relative Strength Index (RSI) is a powerful indicator that can be used in any market, including in the crypto market. It's a fairly basic signal, thus it's a great spot to start studying technical analysis.
A trader will profit from these price swings by purchasing crypto coins like Bitcoin at a low price and reselling it at a higher price; the difference between the selling and buying prices is the profit (or loss) made in that single transaction. We can see two major trends in cryptocurrency trading: traders who constantly trade in pairs with a fiat currency (for example, they buy Ethereum to earn dollars) and traders who only deal in cryptocurrencies (they buy any altcoin to earn bitcoin).
Every crypto trader employs a set of tools to assist him in analyzing the chart he is viewing on a regular basis. Is there a simple-to-understand tool among all the instruments used by traders that is widely used and appreciated by the majority of the community? Yes, it's known as RSI (relative strength index).
J. Welles Wilder, Jr. created the Relative Strength Index (RSI) oscillator. It monitors changes in the closing prices of any trading vehicle to determine its strength. It's a forerunner or coincident indicator, not a laggard.
Technical indicators aggregate historic price movements, calculate a specified value, and show the result in an easy-to-understand manner to anticipate (predict) future price movement of crypto assets.
RSI ranges from 0 to 100. It recognizes a top when it reaches a peak and turns down. It indicates a bottom when it falls and then rises. The width of the time window has no effect on the pattern of RSI peaks and valleys.
The values of overbought and oversold RSI differ from market to market and even year to year within the same market. For both tops and bottoms, there are no magical levels. Signals of oversold and overbought are analogous to hot and cold readings on a thermometer. In summer and winter, the same temperature levels have different meanings.
Levels of the RSI
Horizontal reference lines must pass through the RSI's highest peaks and deepest dips. They're frequently drawn at 30 and 70. In bull markets, some traders utilize levels of 40 and 80, while in down markets, they utilize levels of 20 and 60.
When the RSI rises above its upper reference line, it indicates that the bulls are in control, but the market has become overbought and is about to enter the sell zone. When the RSI falls below its lower reference line, it indicates that the bears are in control, yet the market is oversold and ready to purchase.
When the RSI passes the oversold and overbought levels, the market is in an "excess" stage, in which traders are unwilling to sell or buy beyond what is sensible.
Unfortunately, rushing to purchase in oversold areas and selling in overbought ranges based on the strength of the present trend is not enough to produce a profit. For long periods of time, the RSI can be in "extreme" situations (oversold or overbought).
You can also use RSI to draw a trendline using charting tools like tradingview, to see if RSI movement breaks out from a trendline.
Only when the weekly trend is up does it make sense to buy using overbought daily RSI indications. Only when the weekly trend is down does it make sense to trade short using daily RSI sell signals.
Crypto RSI Strategy
1. Buy when the RSI falls below its lower reference line before rising above it.
2. Sell short when the RSI crosses below its upper reference line after rising above it.
The RSI is a great tool for identifying high-probability entrances and exits, especially when trading on margin.
When you combine RSI with price action analysis, EMA methods, and patience, you can build a solid basis for future growth. Visit Liquid today to see how the RSI indicator may help you make your margin trading strategy more profitable.