What is RSI indicator and why is it important in Crypto investment? If you are new to Crypto, you will surely be interested in the RSI indicator. So, what is RSI and how does it work? Let’s explore the concept of RSI and how to apply it in investment with Crypto Trading.
What is RSI indicator? Why should you learn RSI?
RSI is one of the important oscillating indicators. It is widely used in technical analysis and effective in Crypto investment. What is special about RSI is its ease of understanding and use, making it a favorite tool for many investors. Let’s explore the concept What is RSI indicator and the important things related to this indicator.
What is RSI indicator? Meaning in Crypto trading
RSI stands for Relative Strength Index. This is an important indicator in the technical analysis of products. This index compares the ratio between the number of days with increasing prices and the number of days with decreasing prices. The value ranges from 0 to 100 (average is 50). RSI helps investors assess whether the price of a product is trending up or down. The assessment affects both the frequency and volatility of product prices.
Although there have been many changes in the way investing is done, the concept of RSI has been around long before smartphone trading became popular. RSI was introduced in 1978 in the book “New Concepts in Technical Trading Systems” by J. Welles Wilder. The purpose of this indicator is to help investors determine whether a product is overbought or oversold. Therefore, understanding What is stoch RSI is an important part of the technical analysis of the product.
RSI Index Calculation Formula
RSI calculation formula: RSI = 100 – 100 / (1 + RS)
In which, RS (Relative Strength) is relative strength. It is calculated by dividing the average of the total number of increasing periods by the average of the total number of decreasing periods in a given period (RS = AG / AL).
Time will be calculated from the 14 most recent days.
When calculating this index, Welles Wilder assumed that the buy level occurs when the market has been rising for a long time. At the same time, the sell level occurs when the market has been falling for a long time. Specifically, RSI > 70 is considered the overbought zone, while RSI < 30 is considered the oversold zone. The range from 30 to 70 is the neutral zone. Level 50 shows no clear trend in price.
What is RSI indicator and why is it important to traders?
Here are the highlights of the importance of the RSI indicator in Crypto trading:
- Measuring Market Momentum: RSI is an indicator that helps investors grasp market momentum by measuring price volatility.
- Identifying overbought and oversold markets: Traders who understand RSI will use it to identify when the market is in an overbought or oversold state. From there, make a reasonable decision to open a position.
- Identifying Product Status: RSI helps traders determine whether a product is overbought or oversold.
- Price Correction Forecast: When a product is overbought, it means that it has increased too quickly and may need a correction. Understanding RSI will help investors make timely decisions.
- Price recovery forecast: When a product is oversold, it means that it has fallen too fast and may be about to recover. From there, investors can take advantage of the opportunity to buy.
See more: What is so important about RSI that investors?
Instructions on how to use the RSI indicator in coin trading
The most traditional and basic way to use RSI is to sell when the indicator crosses 70. Buy when the indicator is below 30.
However, this method is not always the most effective. If investing were that simple, no one would take risks in trading.
Another simple way is to use the 50 level. In an uptrend, the RSI usually fluctuates between 40-90. The 40-50 zone acts as support. Conversely, in a downtrend, the RSI will fluctuate between 10-60. The 50-60 zone acts as resistance.
In addition to the above methods, there are many other methods to use the RSI indicator effectively in trading. For example:
RSI Indicator Regular Divergence
Learn about RSI divergences are divided into two types: Bullish Divergences and Bearish Divergences.
- Bullish Divergences: A bullish divergence occurs when the RSI makes a higher low while the price makes a lower low. This indicates that bullish momentum may be building. This is a sign to consider buying or opening a long position.
- Bearish Divergences: A bearish divergence occurs when the RSI makes a lower high while the price makes a higher high. This indicates that bearish momentum may be coming. You should consider selling or opening a short position.
Learn about RSI hidden divergence
We have discussed regular divergences, where the result is usually a trend reversal from bearish to bullish or vice versa. Now, let’s explore hidden divergences, where the price will continue in the current trend.
Hidden divergences also come in two varieties: Bullish Hidden Divergences and Bearish Hidden Divergences.
- Bullish Hidden Divergences: Bullish Hidden Divergences occur when the RSI makes a lower low while the price makes a higher low. Recognizing this signal suggests that the price will continue its uptrend.
- Bearish Hidden Divergences: Bearish hidden divergences occur when the RSI makes a higher high while the price makes a lower high. This is a signal that the price will continue its downtrend.
See more: Opening an Bybit exchange account for traders
What is RSI indicator – Advantages and disadvantages of using RSI
Advantage:
- Potential Short-Term Advantage: Advanced RSI helps capture specific time frames. It provides valuable predictive insights for immediate buy and sell decisions.
- Simple formula: RSI provides a basic mathematical view of the recent trend movement of any instrument. The data-based approach helps to give a quantitative picture. It does not depend on subjective trading factors.
Defect:
- Important Qualitative Factors: Factors like the announcement of a new CEO can have a major impact on how your product performs. The RSI formula doesn’t account for such changes. So even if you understand RSI, you still need to consider qualitative factors to make the right decision.
- Not suitable for long-term investing: The traditional 14-day RSI is not suitable for people who are focused on long-term goals such as saving for retirement. Instead, fundamental analysis, which assesses the overall business performance, profitability, and valuation, is more useful for long-term forecasting.
- Simple but complex to use: RSI is easy to calculate but making buying and selling decisions is still complicated. While you understand what RSI means, you need to realize that it is just one of many indicators used by professional traders, and is not suitable for amateur investors.
Conclude
It is undeniable that understanding What is RSI indicator important in Crypto trading. Indicators from RSI can reflect the price momentum and the next trend of the product based on that momentum. However, RSI cannot be considered as the only tool to measure price speed and predict price trends. Therefore, whether you are an investor, trader, or analyst who has a good understanding of RSI, you still need to use many other technical tools. Crypto Trading hopes that the above information will be useful to readers in Crypto trading. Don’t forget to follow us to get more interesting news!
Frequently Asked Questions
Is it necessary to use RSI together with other tools?
Yes. The RSI is often used in conjunction with other tools such as moving averages, candlestick patterns, or other indicators to create more comprehensive trading decisions.
What information does RSI provide?
RSI provides information about the overbought or oversold level of a product. To help investors quantify and make trading decisions based on this.
Can RSI be used for both short and long-term trading?
Yes, the RSI can be used for both short-term and long-term trading. However, it needs to be combined with other analyses for best results.
