An Intro to the RSI
Figure A
RSI(Relative Strength Index) is derived via a formula, but it means more than just a number. The RSI is used by traders, analysts, and many others to forecast the next move the market may make. This article will discuss how monitoring RSI may help you make better judgments when investing in crypto.
Content:
General Information-
What is the RSI?
How is the RSI calculated?
Additional Information-
Common Ways Investors use RSI
Advanced Ways Investors use RSI
Conclusion-
General Information-
1. What is the RSI?
The RSI is an investing indicator developed in the late 1970s by J. Welles Wilder. Traders primarily use the RSI to help forecast market direction. The RSI is also a momentum oscillator which may* a helpful tool for trading with the right tools.
2. How is the RSI calculated?
Below is an image with the RSI indicator that measures from 0 to 100 in purple. The RSI measures the changes of the asset over 9-15 periods per Figure A. 15 days on a daily chart or 15 hours on an hourly chart. The periods may change depending on the time frame(or period) the trader would like to view. Then once the period is established, the formula divides the average gain the asset had over the time by the average loss it has sustained and plots it from 0 to 100.
Figure B
Additional Information-
1. Common Ways Investors use RSI
Overbought - Oversold
Some of the most common ways the RSI is utilized is by analyzing the oversold and overbought regions. Traders often review overbought/oversold regions to predict either trend reversals or to spot support and resistance levels. As you can see below when the RSI is oversold a bounce may* occur. Just like when the price is overbought a sell may* follow.
Divergences
Another common way the RSI is utilized is through bullish and bearish divergences. Traders review divergences to predict the strength of a move as it may* dictate how much momentum a move may have. Per the second image below, there is an illustration that shows the types of divergences. Each time a divergence happens, you usually see a price bounce or a sell-off.
2. Advanced Ways Investors use RSI
Trend-lines
Some of the most un-traditional ways to use RSI may* be quite effective like using trendlines. In the photo below, you can see a breakout once the blue trendline is broken. While it may seem like a simple strategy, most might underlook how effective this strategy may be. RSI trendline strategies are used in many ways but are not limited to identifying resistances and supports as well.
Support
Another way that I love using the RSI is via trendlines. In the second photo, you will see a photo with horizontal support marked on the RSI. When the RSI broke past the support the price trended. You can also see that when price trends under the same support line, it also trends in the respective direction. RSI support is another underlooked strategy that is quite effective.
Conclusion
The RSI is an indicator used by investors to gauge the market. Additionally, the RSI may be used to forecast future price movements. As we went throughout the article, you may see the many ways a trader may use the RSI. There are many other traditional and dynamic strategies that we haven’t covered. Some traders use EMA’s on the RSI and some combine the RSI with Fibonacci levels. This goes to show that the market is abundant and there are many strategies that one can understand. To close it off, no technical indicator is 100% efficient, especially when used by itself.