zsamochin

Using the Relative Strength Index (RSI)

Education
BINANCE:ADAUSDT   Cardano / TetherUS
Using the Relative Strength Index

The Relative Strength Index ( RSI ) is a very popular and often used indicator that can be used effectively in many different ways. My personal favorite two are:
1. As a tool to indicate a reversal. This is the most popular way.
2. As a momentum indicator . This is what it was designed for.

Below we will discuss how to read the RSI , and how to set it properly depending on market conditions.

What the numbers mean

Before we discuss what to do with the information that the RSI gives us, we should learn what the numbers mean.

The RSI is a line graph that moves from 0 to 100. When the RSI is 70 or over, we consider our crypto to be overbought (people bidding up the price). Then when the RSI is 30 or below, we consider our crypto to be oversold (people bidding down the price).

Overbought means that the crypto might be overvalued.
Oversold is the reverse. The crypto might be undervalued.

The actual number is calculated using the average gain or loss over a set period of time. The default time period is 14 (minutes, hours, days, based on how the chart you are currently looking at is set).

You could also set your period length to a lower number, I use 10 sometimes, so that the RSI is more sensitive to recent moves. This is good to do in markets that are highly volatile (crypto for example).

The actual RSI number will increase as there are more and more positive closes within your time period, and will fall as there are more and more negative closes within your time period.

As with every trading indicator, the RSI should not be used as the sole reason for a trading decision. It helps paint a picture of the market of the particular crypto you’re looking at.

Nor are the default values always to be used. We’ve discussed time changes, but you could also change the upper and lower bands.

In a bull market you may want to change the upper band to reflect the general trend of the market (more on that later).

Trend Reversal

Now, let’s about how to actually use the RSI . The first way to use it is as a way to spot a possible trend reversal.

Put simply, the RSI can help us see if we have, in the last few candles, changed from an up-trend to a down-trend, or from a down-trend to an up-trend.

When the RSI is below 30 and crosses up, we consider this a bullish move.
When the RSI is above 70 and crosses down, we consider this a bearish move.

Just to reiterate: A bullish cross up is not an automatic buy, just as a bearish cross down is not an automatic sell. As you can see below.


But it is pretty accurate.

Nothing in TA is 100%, but the closer you get to 100% the better trader you will be.

One other thing to note based on the above picture is that there was no time that the RSI dipped below 30. In a crypto bull market (which we are currently in) it is more common to see cryptos that are overbought as opposed to oversold. You can compensate for this by changing the oversold line to 40 .

Additionally, as the crypto moves up in price, you can see the RSI making consistent higher lows.

Divergence

One thing to look for when you are trying to spot trend reversals is what is called a Bullish Divergence .

This means that the price of your crypto is in a downtrend and making lower lows. At the same time, the RSI is oversold and is making higher lows.


When you spot this, it can be a very powerful indicator that the trend is reversing to the upside.

A bearish divergence is the same thing but in reverse. The price of the crypto is getting higher and higher while the RSI is overbought and making lower highs.

RSI as a momentum indicator

Another way to effectively use the RSI is by using it for its intended use as a momentum indicator .

As we talked about before, the RSI rises as we have more and more positive closes in our time window. It rises more (faster) when the price movements are more extreme to the upside. The reverse is true for the downside.

So, if we are oversold that means there is momentum to the upside, and if we are overbought that means there is momentum to the downside.

Generally, it is better to trade with the momentum than against it. Unless we spot the reversal signals that we discussed above; crossing back down, or crossing up.

It is also better to go long in bull-markets and short in bear markets when using the RSI in this way.

Let’s take a look at the chart below:

In a bull market the 50-60 range of the RSI acts as support and the RSI usually stays above 40 .

I like to set my upper band to 60 in a bull market so I can trade with the bullish momentum and spot potential reversals in the 50-60 range.

As you can see it is necessary to use the RSI differently in different market conditions.

Final thoughts

As you can see there are different ways of successfully using the RSI . I hope I’ve made at least two of those ways clear in this beginner guide.

Please let me know if you have any questions and if you like it, please hit the thumbs up and be sure to follow for more!

Thanks for reading!

Comments

RSI is a popular technical indicator and it's timeless to learn to about. So thank you for sharing your research with everyone. It's been featured in Editors' Picks.
200 coins
+15 Reply
As you pointed out in the diagram there are many false positives where RSI goes into overbought but swiftly comes back down. Or RSI crosses back below overbought line but faiked reversal. How do you avoid going into trades with false signals?
+8 Reply
zsamochin valenlye
@valenlye, Thanks for the great question!

I wish I had a better answer on how to avoid those trades altogether but even if you get in a trade under perfect conditions there are no guarantees you won't get faked out. Most fakeouts happen because of news events that rapidly shift market conditions. All you can really do is to give yourself an edge over the market. Since I don't know, and I'm not sure anyone does, how to avoid the trades totally the next best thing is to not lose money. I do have a system I use to manage risk.

What I like to do though is to set stops. Not stops on the price but stops on the RSI (trading view has alerts for this). For example, looking at the last chart at the 'Failure', I usually won't get out of a trade until the RSI closes a candle under 50. Remember this is in bull-market conditions (I like the 50-60 range as support). That trade would not have lost money. Just opportunity cost for those three days.

Also, the breakout on the 28th of February (still last chart), would not have been a good entry point because the RSI only got to about 63. I don't think that is really 'decisive'.

Your question made me realize that I need to establish a better way to enter the momentum trades. I need to define what a 'decisive breakout' would be.

See, the idea behind these trades is to get in and ride the wave until the market really cools off. This is done using the RSI and not price because the RSI will stay elevated (over 50 for these trades) during periods of consolidation - see Feb 5th - Feb 8th. Staying in would have been great here because ADA still had room to run up.

I hope all that made sense and clarified a few things. I can't post new charts as comments (I think) so I hope I was clear. Thanks again for your question. I think making those rules will make me a better trader!
+2 Reply
valenlye zsamochin
@zsamochin, thank you very much for the clarity. It is much clearer now to understanding your thought process to handling these signals and I learnt a lot. Your approach makes a lot of sense and in trading I find that I absorb better with logical concepts rather than vague and abstract methods.

Another question that I have is when you see a 'decisive' break of the overbought level, do you enter right on the candle closure and the next candle open? Bearing in mind that price could be a strong impulse move and have traveled a lot higher on entry with this method, but I suppose it prevents fake out. On your mention of defining what is a decisive break maybe it could be reaching level 65/70 when the actual level is 60?

Similar to the momentum trade, for a reversal signal do we need a solid ('decisive') entry back into normal territory (30-70 normally) from an overbought/oversold zone before we take a trade.
Reply
zsamochin valenlye
@valenlye, My general attitude towards trading is that I'd rather be right instead of having my money tied up in a trade that goes nowhere (and I especially don't want to lose money). So yes, I do wait for the more decisive breaks at a close. Another reason for this is that, in crypto especially, we can have a whole lot of volatility during one candle that pushes the RSI into whatever range you're looking for, but it ends up closing outside your target. The trading view alerts are really good for catching moves into your zones.

Another indication that I like to look out for is if there is room to the left. The last thing you want to do is to get into a trade where the upside is limited by a nearby resistance level. One reason the ADA graph looks so good is that there was a lot of room to run for that trade.

I like the idea of 65-70 but I'll have to look at the charts to see if that is the best range.

My thoughts on your second question are the same. Better to get into something that you're more confident in rather than having your money tied up. However, if you're using the reversals to exit a trade, you'll want to be more focused on price. Remember that the RSI is determined by price, not the other way around. One strategy you could use is to move your stops up as you are more positive in a trade. Now we are getting into the territory of your personal comfort with risk and how hands on you want to be.
+4 Reply
Bitpal488 zsamochin
@zsamochin, Hello friend
Reply
watchtrend valenlye
@valenlye, Agree that TA is great option to see the trend - but believe that whale trend are the best signal we can have, the same with this below chart IOTX where we see whale trend incoming
Reply
I didn’t quite get that, I’m afraid I need a private lesson 😆
+3 Reply
Using Bollinger with RSI issa greater idea... I like using it together.

They comprehend each other, ascertain over bought - oversold wella...

Thumb up
+2 Reply
Home Stock Screener Forex Screener Crypto Screener Economic Calendar About Chart Features Pricing Refer a friend House Rules Help Center Website & Broker Solutions Widgets Charting Solutions Lightweight Charting Library Blog & News Twitter