RSI index is a popular technical indicator in the Crypto market. This is a useful tool to determine the continuing trend of prices. Understanding the meaning, traders will apply advanced RSI to help their coin trading strategy more effectively. To make good use of this indicator, see the details in the article from Crypto Trading below.
What is an RSI indicator?
The full name of the RSI index is Relative Strength. This is a relative strength index, a momentum indicator that measures price changes. From there, it determines the price trend of an asset that is in an overbought or oversold phase.
The RSI index in coin trading is a popular index in market technical analysis. This index is shown in the form of a graph and is calculated from 0 – 100, between this extreme distance is a price movement line and traders rely on it to determine the asset trend.
RSI Index Contents
The first time the RSI index was published to the market was in 1978. This is a tool invented by J. Welles Wilder JR. According to him, the Crypto market increases in the long term, it will be an overbought period. On the contrary, the market decreases in the long term, it will be an oversold period. With the index measuring from 0 – 100, we have:
- RSI value from 70 and above: The market is overbought, buying volume is increasing strongly, and Crypto prices are being pushed too high.
- RSI value from 30 or below: The market is oversold, the sellers are more dominant so the Crypto price is being pushed down.
- RSI value from 30 – 70: Average. RSI = 50: Sideway market
The most basic RSI calculation formula
To understand what RSI is in coin trading, traders need to understand how to calculate it. This formula is quite simple, the price momentum value will be calculated in the last 14 days according to the formula: 100 – 100/(1+RS).
In which, RS is the relative strength of the price. This quantity is calculated by dividing the average of the total number of increasing periods by the average of the total number of decreasing periods in 14 days. And after calculating, if the RSI value is at a certain threshold, the market will be in that price trend.
See more: What is so important about RSI that investors?
Meaning of RSI index in coin trading
For coin traders, the RSI indicator is an important indicator. Through the RSI calculation formula and determining its value, traders will also:
- Divide the overbought and oversold zones of the asset. From there, you will also know whether the price is being adjusted up or down, and how the trend is reversing.
- Predict the future uptrend or downtrend of the market. The market trend will be up if the RSI value is greater than 50, or the RSI value is in the 45 – 55 range and then breaks out of the 55 level. And conversely, the market trend may be down if the RSI crosses the 50 level from above (downtrend). Or the price is in the 45 – 55 range and then falls back past the 45 level.
- Identifying price divergence and convergence is the basis for determining reasonable selling or buying points.
Advanced RSI: How to apply the RSI index in coin investment?
In market analysis, the RSI index is a very good and effective tool. Using advanced RSI will help traders identify trends and find safe entry points. There are 4 ways for traders to effectively utilize this tool for trading:
Using the RSI formula combined with time frames
Using the RSI indicator in combination with the time frame will help traders identify market trends. With this method, traders proceed as follows:
- Use the D1 time frame to examine the price trend. If in this time frame, RSI > 70, the market is oversold, RSI < 30, the market is overbought. Corresponding to oversold, traders will buy because the market will reverse from down to up. Corresponding to overbought, they will sell because the market is going from up and is likely to reverse to down.
- Use the H4 time frame to determine the entry point. Wait for the price to enter the oversold zone on the H4 frame to buy. Or when the price enters the overbought zone on the H4 frame to sell.
Using the RSI index in combination with the MA line
With this method, traders first use advanced RSI to determine the trend on a large time frame, for example, D1. Then continue to use a smaller frame (H4) to find entry points. At H4. If RSI < 30 then buy, RSI > 70 then sell.
For more accurate signals, traders use it in combination with the MA line. Specifically, the Bollinger Bands indicator. This indicator is a combination of MA with the price standard deviation. It is called a lagging indicator.
Identifying overbought and oversold zones on the H4 frame, but if you are still concerned, combining this tool will help traders locate the most accurate overbought and oversold zones:
- Price touches the lower level of MA: Crypto is in the oversold zone.
- Price touches the upper level of MA: Crypto is in an overbought zone.
Traders should check whether this signal coincides with the overbought and oversold signals in the time frame. If the two signals give the same forecast, then it is definitely the time to enter the order. If there is a discrepancy, review the RSI calculation formula to see if you have calculated its value correctly.
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Using the RSI index in coin trading combined with the SMA line
Combining with the SMA line is also an effective way to use the RSI index in coin trading. At this time, traders will use the SMA 30 line and determine buy and sell orders according to the following signals:
- SMA 30 cuts up SMA 100, RSI value >50: Buy order
- SMA 30 cuts down to SMA 100, RSI value < 30: Exit Buy
- SMA 30 cuts down to SMA 100, 30 < RSI < 50: Sell order
- SMA 30 crosses SMA 100, RSI > 70: Exit Sell order
Using Advanced RSI with Reversal Candlestick Patterns
Using the RSI indicator in combination with reversal candles is a very simple way to determine the entry point. Traders just need to wait for the RSI to reach overbought/oversold values. Then, when a reversal candlestick pattern appears at that price position, they will place an order. The reversal candles are the evidence confirming the trend that the RSI has provided.
Advantages and disadvantages of the RSI index
RSI is a simple tool but very effective. On trading platforms, there are pre-calculated formulas and traders just need to install the indicator on the chart to have enough trading data. It also gives accurate and reliable trading signals, can be used independently, and is still very safe.
However, this is a momentum indicator. It only shows us the change in price momentum in two up-and-down trends. Therefore, its value can last for a long time before it actually reverses.
For example, you trade RSI at oversold levels. At this point, you decide to buy the coin and wait for the price to increase. But the RSI value is still oscillating in the oversold zone and it takes a long time to increase. During that time, there may be a risk that the price will continue to fall and the trader may lose money sooner than expected.
Therefore, to use RSI most effectively, traders should apply it in markets with alternating ups and downs. If a trend is maintained for too long, the RSI indicator is not a safe tool.
Conclude
Above is all the information about the RSI index as well as how to use it to invest in coins that Crypto Trading wants to convey to you. If you need in-depth advice, please leave a comment below this article. Don’t forget to share this useful information to help other traders make good use of RSI in the investment process.
FAQs
What is the basic point in the content of RSI?
RSI shows investors the correlation between the number of days of price increase and the number of days of price decrease of the asset (calculated in a 14-day cycle). This ratio will be between 0 – 100
Does the RSI indicator give false signals?
Yes, since the indicator relies solely on price momentum to give signals, there will be errors and trading signals will be infrequent.
Which indicator should I combine with RSI to get the most accurate signal?
Traders can use RSI with MA line, SMA line, and Japanese candlesticks… to trade.
