Relative Strength Index

What Is the Relative Strength Index (RSI)?

The relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes. It let us evaluate overbought or oversold conditions. RSI moves between a reading of 0 and 100, often in an oscillation behaviour.

In Crypto asset, when the RSI value hits 70 and above, it is a sign of overbought while when it hits 30 or below, it indicates an oversold condition.

A recent Bitcoin price fluctuation data is extracted and depicted in the figure below. In general, when the RSI is less than 30, it means that the market is oversold, and that the price might eventually increase. Evidence of the price reverse is seen on price marked with Green dots. Usually, when the reversal trend is confirmed, a buy trade can be placed. Conversely, if the RSI is more than 70, it means that it’s overbought, and that the price might soon decline. From the figure below, the overbought condition is marked with Red dots. After a confirmation of the reversal, a sell trade can be placed. The 50 level is the midline that separates the upper (Bullish) and lower (Bearish) territories. In an uptrend, the RSI is usually above 50, while in a downtrend, it is below 50.

Single or multiple technical indicators?

A single indicator does not constitute to a trading strategy. In the previous posts, Qidax has covered moving averages, MACD, Bollinger Bands and in this post, RSI.

While an indicator can help traders in identifying market conditions, a strategy is a trader’s rule book and traders often use multiple indicators to form a trading strategy. Qidax recommends the use of different types or categories of indicators, i.e at least one momentum indicator and one trend indicator to form a trading strategy. The ideal type of indicator a trader uses depends on what type of strategy the individual plans to develop. This is highly depended on individual trading style, frequency and profit taking ratio.

In the upcoming post, Qidax will focus on combination of different technical indicators for better entry and exit points in crypto assets. Each indicator and indicator combination requires research to determine the most suitable application according to the trader’s style.