RSI Trading indicator is considered one of the important indicators in investment. RSI helps traders analyze technical indicators more easily. However, many new investors still do not know what RSI is. Let’s find out the details of Crypto Trading through the content of the article below.
Learn about RSI Trading indicator
What is RSI indicator?
stochastic RSI crypto is also known as a divergence indicator. This is one of the important indicators in technical analysis tools. This indicator is used to measure the speed and oscillation between the two extremes of overbought and oversold in the market.
The RSI was developed by Wilder, who recommended that investors use the 14-day indicator. Later, the RSI became more popular, ranging from 9 to 25 days. The shorter the time period, the higher the sensitivity. The longer the time period, the lower the sensitivity.
So, the 9-day RSI will be more sensitive and volatile than the 25-day. You should also note that the higher the sensitivity, the higher the chance of getting false signals.
The RSI line used in Trade Coin is considered overbought when it is above 70. At the same time, it is considered oversold when it is below 30. Specifically as below:
- Oversold: This means that the asset is being sold at a price lower than its actual value.
- Overbought: A condition where an asset is priced too high. This occurs because many traders buy it at too high a price.
Advanced RSI Meaning
Below is the meaning of the advanced RSI line in the Crypto investment process that you can refer to:
- Divergence and convergence:
- Divergence: This occurs when the asset price and RSI move in opposite directions. This is considered a signal of a trend reversal. For example, if the price makes a new higher high, but the RSI makes a lower high, this is a sign of a downward correction.
- Convergence: Occurs when price and RSI move in the same direction to confirm the current trend.
- RSI Moving Average: You can use the RSI moving average to confirm buy or sell signals. For example, a buy signal is placed when the RSI crosses above its moving average.
- RSI Stochastic: Combines the RSI line with the Stochastic indicator to generate more accurate signals. Stochastic RSI is a technical analysis indicator created from the RSI indicator, to increase the sensitivity of RSI to short-term price changes.
See more: What is so important about RSI that investors?
How to calculate RSI Trading indicator
The RSI Trading indicator is calculated by dividing the average price increase by the average price decrease over a given period of time. The indicator is then displayed on a scale from 0 to 100.
The specific formula for calculating the RSI index is as follows:
- RSI = 100 – 100 / (1 + RS)
- RS (14) = Σ (Positive Price Increase) / Σ (|Negative Price Increase|)
How to use RSI Trading indicator
If you are a new investor and do not know how to use the RSI line effectively, please refer to the following methods:
RSI Indicator – Trend Identification
You can use the RSI indicator to determine future market trends. Because this indicator can give new trend forecasts in two forms below:
- Upward market trend: When the RSI line exceeds 50 from bottom to top. Or, when the RSI is in the range of 40 – 60. Or this index can suddenly surpass this zone and move above 60.
- Bearish market trend: In case, the RSI line exceeds 50 from top to bottom. Or the RSI line is in the range of 40 – 60 and suddenly moves below 40.
Although these signals cannot help you determine the exact entry and exit points. But if you identify the market and combine it effectively with other indicators such as Trendline, MACD, MA,… then you will be able to make accurate trading decisions.
Using RSI Indicator as Reversal Divergence Signal
Reversal divergence is a phenomenon where the price makes a new high but the RSI makes a lower high. Or it can be that the price makes a new low but the RSI line makes a higher low. That is the “phase difference” between the price and the indicator. This can reflect that the price’s strength is gradually weakening and may reverse.
When using reversal divergence signals to make investment transactions, there are 2 possible cases, such as:
- Uptrend: At this time, the new peak will be lower than the old peak/ new bottom will be lower than the old bottom and the RSI will appear to be oversold and higher than the old level/bottom of the price line. This means that the price will probably increase and when the RSI line crosses the oversold zone, a new “Long” position can be created. You should place a buy order if you see this signal.
- Downtrend: At this time, the price creates a new high that is higher than the old high/ new low that is higher than the old low. However, the RSI line has a new overbought level lower than the old level equivalent to the price line’s high/low. This means that the price may decrease. And if the RSI crosses the overbought level, a new “Short” position may appear. You can take a sell action if you find this signal.
However, if the market trend is stable for a long time, divergence rarely appears. At this time, you can proactively adjust the overbought and oversold levels depending on the certain uptrend or downtrend.
Draw market trend lines for RSI indicator
Just like drawing price trend lines, you can also draw lines for RSI indicator. Then see the signals you get after doing so.
You can use the RSI Swing Rejection method. This method is used to determine the behavior of the RSI indicator. At the same time, it helps you to check the current price trend.
If the market is in an uptrend, there will be 4 stages as below:
- RSI at 30% oversold
- RSI crosses 30%
- RSI moves down but does not exceed oversold level
- RSI makes new high
If the market is in a downtrend, there will be 4 stages that appear as follows:
- RSI indicator crosses above 70% overbought level
- RSI falls below 70%
- RSI moves up again but does not exceed 70% overbought level
- The RSI then made a lower high.
Advanced RSI Limits
Similar to other technical indicators, the RSI signal is most reliable when used in a long-term trend. At the same time, it also works well in markets where prices alternate between periods of increase and decrease.
Combined with MACD indicator
The MACD is an indicator used to measure the relationship between two EMAs. Meanwhile, the RSI is used to measure the recent price changes in overbought and oversold levels. Therefore, these two indicators are used together to help traders better understand market trends.
See more: MEXC: Open a MEXC account, invest effectively
Things to note when using RSI Trading indicator
When using the RSI line, you need to keep in mind the following things. Considering these things will help you minimize the unfortunate risks that may occur during the investment process:
- It is recommended to use the RSI line on multiple time frames to get a more comprehensive view of the market.
- You can adjust the RSI indicator according to certain market conditions.
- Look for divergence signs between price and RSI to predict trend reversals.
- Use the RSI Trading indicator in combination with other indicators such as MACD, MA,… to determine the current market trend most accurately.
- It is necessary to set appropriate stop loss and take profit levels to manage possible risks when receiving signals from RSI.
Conclude
The above article is all the information about RSI Trading indicator in the most detailed way. Hopefully, the above useful information can help you feel more secure and confident when investing in Crypto. However, these indicators do not help you make 100% accurate investment decisions. If you want to place a successful order, you should learn more knowledge at Crypto Trading to create your own most effective trading plan.
FAQs
How to use RSI indicator to find entry and exit points?
RSI above 70 indicates that the asset is overbought and is likely to correct lower. Conversely, an RSI below 30 indicates that the asset is oversold and is likely to rebound. Look for divergence between price and RSI to identify potential reversal points.
Can the RSI indicator be applied to all cryptocurrencies?
The RSI indicator can be applied to all cryptocurrencies. However, the effectiveness may vary depending on the characteristics of each coin. So, test and adjust your strategy to suit each specific cryptocurrency.
How to avoid false signals from the RSI indicator?
Combine RSI with other indicators and analysis tools to confirm signals. Use appropriate stop loss and take profit levels to manage the risk of receiving incorrect signals from RSI.
