how to use it and is it suitable for cryptocurrencies

Main

• The Relative Strength Index (RSI) is a technical analysis tool, an indicator that measures the speed and magnitude of asset price movements, including cryptocurrencies.
• The main task of the RSI is to analyze the strength of the price impulse and help in determining the level of overbought or oversold assets.
• RSI is depicted on the chart as an oscillator with a value from 0 to 100. The generally accepted overbought level of an asset is a zone above 70, oversold – below 30.

Who and when developed the RSI indicator

The RSI indicator was developed by Wells Wilder, an American mechanical engineer and technical analyst, who first introduced this tool in his book New Concepts in Technical Trading Systems, published in 1978.

Wilder – recognized specialist and innovator in the field of price analysis and forecasting. He is the author of other popular instruments, including the Average Directional Movement Index (ADX), Average True Range (ATR) and Parabolic SAR.

Calculation and setting of the RSI indicator

The RSI indicator “weighs the forces” of rising and falling asset prices. The following formula is used to calculate RSI values:

RSI = 100 – 100 / (1+RS)

RS is the average exponential of the price when the asset rose over the considered time period divided by the average exponential price when the asset fell over the considered time period.

Most modern trading services and exchanges have a built-in RSI indicator with the function of fine tuning to the needs of traders. Many people use the default indicator settings, choosing a 14-day period. There are other common options depending on preference:

• for intraday trading, the timeframe of 7-11 days is most often used;

• traders trading in the medium term use a 14-day time frame;

• for long-term trading use a period of 21-30 days.

Initially, RSI was widely used in the stock market, but now it is also used for the cryptocurrency market, in particular, to analyze the price of bitcoin and any other trading instruments based on cryptoassets.

Using the RSI indicator

Being an oscillator, the RSI chart is suitable for drawing technical analysis patterns, support and resistance levels, and also helps to determine whether an asset is overbought or oversold.

The upward movement of the RSI chart means that the momentum of the asset’s price movement up is stronger than the momentum of the asset’s movement down – it is assumed that this is a sign of a “bullish” trend. When the RSI chart moves down, it is assumed that bearish sentiment prevails in the market.

The RSI value can be from 0 to 100. The generally accepted overbought level of an asset is above 70, oversold – below 30. When using the indicator for intraday trading, RSI becomes more sensitive to price changes. Therefore, it is customary to expand the overbought and oversold ranges of an asset above the values ​​of 80 and 20, respectively.

What is divergence

The RSI indicator is often used to analyze and determine a trend change. When the RSI price charts move in opposite directions, this situation is called a divergence.

A bearish divergence is formed when the price of an asset shows a new local maximum, and the value on the RSI chart turns out to be lower than the previous local maximum. The price is in an upward movement, the RSI indicator is in a downward movement. This situation is perceived by the market as a possible reversal of the price trend to a downtrend and the damping of the growth impulse.

In turn, a bullish divergence means that the price of an asset is in a downward movement when the RSI chart showed an upward movement. This situation is perceived by the market as a possible reversal of the price trend to an upward one and the damping of the momentum of the asset price fall.

Advantages and disadvantages of RSI

RSI has gained popularity for its ease of calculation and clear interpretation of data. It has become a popular tool for technical analysis of long-term cryptocurrency price movements: the higher the price averaging period, the fewer false signals the indicator shows.

This indicator is used not only to find “good” entry and exit points – It also helps to avoid situations in trading such as bull and bear traps.

Despite these advantages, RSI has known disadvantages. One of them is the lagging nature of the data displayed on the chart. While the indicator displays its value on the chart, the market situation may change more than once. Like any other technical analysis tool, RSI is recommended to be used in conjunction with other analytics tools.