Chances are you’ve probably heard of the RSI indicator.
You might have used it before, and perhaps you want to check you’ve got your facts right.
In either case, you’re in the right place.
The RSI is incredibly simple to use and can be factored into a profitable trading strategy.
For crypto traders, its available for on every major crypto trading platform / exchange. But, if you haven’t got TradingView, get it.
What is RSI
The RSI is a few things, but these are what you should know about.
You’ll find that it’s useful across multiple assets. It was originally designed for stocks. But traders often use it in crypto and forex.
However, just because it is popular does not mean that it is the panacea for all your trading problems. It should be considered, but not used as a single source of truth.
Relative strength index
RSI stands for ‘relative strength index’.
‘Relative strength -‘
The RSI indicator measures the strength of more recent price changes relative to the less recent previous changes — with the period defining the range over which it is measured, usually 14 candlesticks.
It’s an index indicator. The RSI oscillates between 0-100. This takes out a lot of the fluff of price movements. This way, you just need to measure the value between the two extremes — 0 and 100.
The RSI is used to help predict future price movements before they happen. Leading indicators are often inaccurate, due to the undecided nature of the future.
The RSI depicts the changes in momentum price changes. The steeper the RSI traces, the higher the momentum.
How to read the RSI indicator
The RSI indicator can be read in a few different ways. The most common read is whether an asset is overbought or oversold.
Overbought and oversold
The RSI shows the trader two things: when an asset is considered overbought and when an asset is considered oversold.
When the RSI crosses above the 70 RSI signal line, it is overbought. At this point it is considered a potential selling opportunity.
Examples of RSI overbought regions on CHZUSDT.
When the RSI crosses down below the 30 RSI signal line, it is oversold. When an asset is oversold, it is potentially cheap to buy.
Examples of RSI oversold regions on BTCUSDT.
What does RSI stand for?
RSI stands for Relative Strength Index.
Setting up the RSI
Most common RSI inputs
Most trading platforms will ask for 3 inputs:
- The period; which is usually 14.
- The overbought line; usually 70.
- The oversold line; usually 30.
- The price value; usually Close–this the Close value of each candle.
Less common inputs
Depedant on the trading pair, some traders may change the overbought and oversold signal lines. In my experience, the only suggestions aside from 30-70 that I have come across are 20-80. (Where 20 is oversold, and 80 overbought.)
How to calculate the RSI
It’s not essential to know how to calculate the RSI, as most platforms will provide the indicator for you. However, if you can understand the formula, you will have a more granular understanding of what the indicator is telling you. You will also get a picture of why it should not be used alone — because it is a ‘relatively simple’ indicator.
I’ve stepped out the RSI formula for you below, with the variable on the left, and calculation or explanation on the right.
n) – The period input, how many bars on a timeframe to consider–usually 14.
avgUp) – The average of all green bars in the last
avgDown) – The average of all red bars in the last
RS) — The ‘relative strength’ —
100 - 100/1+RS.