- By Pierre-Alexandre
March 26th, 2019
The Relative Strength Index known as the RSI is a favorite trading tool used by cryptocurrency traders. The tool helps traders quantify the gains and losses recorded on an asset over a set period of time. It is one of the most used trading tools and indicators used by crypto traders and can help both beginners and veteran.
The RSI number starts at 0 and ends at 100. The numbers help users determine if a cryptocurrency is oversold or overbought. An RSI of roughly 70 implies that an asset is overbought while below 30 signals that the asset is oversold.
Another advantage of the indicator is that it helps traders determine if a crypto asset is close to a bullish run or a bearish trend. An RSI reading below 50 indicates that the asset is bearish while above 50 shows that it is moving towards a bullish phase. If the figure fluctuates below the 50 mark for an extended period of time, the crypto asset is in a bearish cycle, while movement between 50 and 100 for an extended period shows that it is on a Bullish Run.
How does RSI work?
The RSI is calculated using a special formula developed by a technical analyst, Welles Wilder four decades ago. To get an RSI value, use the formula below:
RSI = 100 – 100 / (1 + RS)
RS stands for the average of X period closes up or the average of X period closes down, X meanwhile stands for the number of RSI periods. 14 is used in most cases.
The indicator can help users know if a crypto asset is overbought or oversold. A cryptocurrency RSI that drops below the 30 mark shows that the crypto is oversold and could be a good time for the asset to be bought. However, if the RSI exceeds the 70 marks, then it indicates that the price is overvalued or it is overbought, and at this stage, some traders would look to cash in and sell the asset.
The overbought condition can be detected in the oscillator. The higher the RSI value goes above the 70 mark, the more it is overbought and the lower the price would fall when the pullback phase arises.
In the oversold condition, the lower the RSI value plunge below the 30 point, the more oversold the asset is and the higher the price could rise when the bullish phase comes around.
There are other indicators that crypto traders should consider when trading digital currencies. However, the RSI produces some good signals regarding the price movement of crypto assets.