Using the Relative Strength Index (RSI)
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!
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!
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