Simple Guide to RSI in Cryptocurrency Trading

The ability to correctly analyse buying and selling signals is an important skill for anyone interested in crypto trading. If you can accurately predict market price movements, you will be able to identify when to buy or sell. One of the most effective tools for this purpose is the Relative Strength Index (RSI), which was introduced in 1978 by J. Welles Wilder Jr., a pioneer in technical trading indicators. RSI is a timeless tool in trading. It is versatile, consistent, and has a proven track record. Let’s learn about this tool. 

1. What is RSI

RSI is indeed a momentum indicator, which assesses the momentum, price and speed of price changes in cryptocurrencies. Typically, it helps determine when an asset is either overbought or oversold. RSI can be utilised to spot market signals and to measure whether the market is in a bullish (upward) or bearish (downward) trend.

1.1. How to Calculate RSI

The below given is the formula for calculating RSI. 

RSI = 100 – [100/(1+RS)]

In this formula, RS means “Average Gain/Average Loss”. 

To calculate average gain, you have to use the formula “Average Gain = Sum of gain per period/time frame”.

Likewise, for average loss, you can use the formula “Average Loss = Sum of loss per period / time frame.”

It is not necessary that you should learn to calculate this complex calculation, but you should know the concept behind this. 

The concept is simple: it involves looking at how much the price has gone up on average compared to how much it has fell down over a specific period, usually 14 periods.

2. Easy Steps-by-Step Guide to Use RSI in TradingView 

• Step 1: Open TradingView

Launch the TradingView platform in your web browser.

• Step 2: Select a Random Chart 

Use the search bar to find a random chart. We can select the ‘Bitcoin/TetherUS’ trading pair chart, for the example purpose.

• Step 3: Choose the Chart Time Frame 

Click on the time frame icon on the top – the “D” icon on the top right corner,  and select the “Daily” chart to view daily price data. If you wish, you can choose other available options also, weekly, hours and more.

• Step 4: Add RSI Indicator

From the indicator menu, found on the top besides the candles menu, search for “RSI” and add it to your chart. 

• Step 5: Configure RSI Settings 

Click on the settings icon seen in the RSI space. Look for the input option. And, set RSI length, Source and Timeframe as per your preference.

• RSI length:- Number of periods considered for RSI calculation, often set to 14 for default. 
• Source:- The price date used for RSI calculation, usually the closing price. 
• Timeframe:- Time interval for RSI calculations, often matched with the chart’s timeframe.    

• Step 6: Identify Overbought or Oversold Conditions 

RSI values above 70 typically identicate overbought conditions, and below 30 points at oversold conditions.  

• Step 7: Experiment With Innovative RSI Strategies 

There are many other innovative ways to use RSI, such as Reversal Signals, Trend Phases, and more. Feel free to experiment and learn. 

3. Ways to Use RSI to Find Profitable Trades 

The two simple, yet important ways to use RSI are:

• Using RSI for Reversal Signals

A market overbought situation means there is strong buying pressure or a sustained uptrend. Likewise, a market oversold situation indicates significant downward momentum.

• Identifying Trend Phases 

To do this, we adjust the RSI by adding lines at 20, 40, 60 and 80. If the RSI consistently oscillates between 60 and 20, it is likely in a downtrend phase. Likewise, if it moves between 40 and 80, it is likely in an uptrend phase.  

Endnote

In conclusion, the RSI indicator is a valuable tool for anyone venturing into the world of crypto trading. It helps you measure the momentum, price changes and market conditions. Calculating RSI might involve some complex mathematics, but the concept is simple: it compares how much prices have gone up versus down over a specific period. With a step-by-step guide on using RSI in TradingView and insights into identifying overbought, oversold conditions and trend phases, you are better equipped to make informed trading decisions. Anyway, there are numerous innovative ways to explore RSI further, offering even more potential for profitable trades in the exciting crypto market. 

Well Done! You have now completed the Lesson.

Complete the Quiz and Get Certified! All The Best!

Enroll Quiz