How to Trade Cryptocurrency Using Relative Strength Index (RSI)
The relative strength index (RSI) indicator comes in handy for identifying trade opportunities across the crypto markets. Traders use this oscillator to measure the speed and change of price action. The most common setting for the RSI is the 14-period average that oscillates between 70 and 30.
Just like other technical analysis tools, this indicator can be used in any time frame suitable to your trading objective. In this article, we show you how to use RSI correctly to improve your success rate in the crypto markets.
Let’s dig in.
How RSI Works
The RSI oscillates between 0 and 100. Traditionally, it is considered oversold when it is below 30 and overbought when it is above 70. You can always adjust these levels to fit your cryptocurrency or asset better. For instance, if a cryptocurrency asset is continuously reaching the overbought level of 70, you can raise the level to 80. Remember that it is not unusual for the RSI to remain in the oversold or overbought region for long periods during strong trends.
The RSI is a critical trading tool because it forms chart patterns (such as double tops and bottoms) that may not show on the underlying price chart. Traders may also look for support and resistance with this indicator.
In a bullish market, the 40 to 50 zone acts as support, and the RSI typically remains in the 40 to 90 range. In a bear market, the resistance zone is at 50 to 60, and the RSI usually remains at 10 to 60. These ranges are subject to the RSI settings as well as the strength of the cryptocurrency and the market's underlying trend.
Sometimes, the underlying prices may make a new high or low that is not confirmed by the relative strength index. Such divergence may be an indication of a price reversal.
The basic formula for calculating the Relative Strength Index is:
RSI = 100 – [100 / (average of upward price change/average of downward price change)]
RSI Trade Signals
The Relative Strength Index gives traders several signals. They include:
· Defining the current trend
In addition to being a buy and sell signal indicator, the Relative Strength Index gives you the ability to gauge the main direction of the trend.
For a bullish market, you want to stay on the lookout for 70 or 80 levels, and for a bearish market, you want to look out for 30 or 20 levels.
· RSI support and resistance
The Relative Strength Index can show the support and resistance levels in the market. These levels can come in two forms, either as sloping trend lines as shown in the chart below or as horizontal lines.
· RSI divergence with price
You can spot divergence where the price is making a new high, but the Relative Strength Index is unable to top itself. This shows that the RSI is beginning to roll as the price goes higher.
· RSI double bottom signal
The first price bottom, which forms after the cryptocurrency has been in a strong uptrend for some time, is made on heavy volume.
This explains why the RSI has been above 30 for an extended period. The first price sell results in a breach of the 30 on the relative strength index. After this, the cryptocurrency experiences a short-lived snapback rally followed by a snapback that breaks the low of the first bottom. The second low forms a double bottom on the price chart.
The following Bitcoin futures chart illustrates this point around double bottoms.
Remember to exercise caution. It is not unusual for traders to spot these setups and automatically assume that they will work. It is crucial to remember that even though some of them will work, there are no guarantees. Consider using RSI together with other technical indicators that will help you filter out false signals.
RSI Trading Strategies
The following are some of the strategies you can use together with the RSI to reduce the number of false signals that are so rampant in the market.
· RSI + price action trading
In this trading strategy, we will use the Relative Strength Index and the oversold signal together with any price indicators such as trend lines, chart patterns, channels, candlesticks, etc.
To enter a trade, you need an RSI signal and a price signal. Hold on to your trade until you get a contrary RSI signal or a price movement that indicates that the move is over.
· RSI and MA Cross
With this trading strategy, you will match the moving average cross indicator to the RSI. You only buy or sell the crypto asset when you pair the overbought or oversold RSI signal with a supportive cross over of the moving averages. Hold this position until you get a divergence on the chart or an opposite signal from one of the indicators.
You should note that a regular crossover from the moving average is not necessarily a sign that you should exit a trade. Always wait until a candle closes below both lines of the moving average cross before you exit.
· RSI + RVI
When combining the Relative Strength Index with the Relative Vigour Index (RVI), you only trigger a trade when you see matching signals on both indicators. Hold this position until one of the tools gives you the opposite signal.
· RSI + MACD
When using this strategy, you execute your trade when the RSI gives you an oversold or overbought signal that is supported by the MACD (moving average convergence/divergence). You should close your trade if either indicator shows an exit signal.
Final Word on Trading Using Relative Strength Index (RSI)
The Relative Strength Index (RSI) is one of the significant oscillators used to assess pricing dynamics against previous values. It offers an opportunity to define the emotions in the market and spot the points where the market is either overbought or oversold.
Although it is a reliable indicator on its own, the RSI is better off used together with other technical indicators. Pairing it with other tools reduces uncertainties and increases your chances of success.
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About the author:
Jay Jackson is a blockchain enthusiast and a freelance writer at topcryptowriter.com. He works closely with brands (people, businesses and startups) in the crypto sphere. He currently writes Blog posts, Guides, Press releases, ICO reviews, eBooks & Whitepapers. You can find him on LinkedIn.
The above references an opinion and is for informational purposes only. Do not take this as personalised financial or investment advice. The views expressed by the author do not necessarily represent the opinion of BitPrime.
Last updated: 24/08/2019