How to use RSI indicator for Crypto Trading?
When you begin trading and utilizing the trading chart, you will come across multiple technical analysis tools such as the Relative Strength Index (RSI).
Relative Strength Index (RSI) is a technical tool that measures the relative speed of price changes/movement. It uses averages over several days rather than a single price points. However, it uses the ratio method like momentum.
How To Calculate RSI?
Although it’s not required to make trading strategy decisions, it’s good to know how the RSI is calculated to have a better understanding of what you are using.
Below is how to calculate the RSI indicator:
- Relative Strength (RS) = Average Close – Previous Close on Up Days / Average of Previous Close – Current Close on Down Days
- Relative Strength Index (RSI) = 100 – (100/(1+RS)
How does RSI work?
RSI value ranges between 0% to 100% (it rarely goes all the way to zero or 100). The value will be written as RSI(#).
You can find the RSI feature in the price chart below (in yellow background at the bottom of the price chart).
The RSI value will vary between the following ranges:
- 30% to 70%
- 20% to 80%
- 10% to 90%
Meaning of RSI Percentage Values
- Close to 0% = Asset or security is fully oversold. This is an entry point for a potential bullish uptrend.
- Close to 100% = Asset or security is fully overbought. This is an exit point for a bearish a potential downtrend.
- Around 50% = Market is indecisive on whether to buy or sell the asset or security. This is an important point for traders to incorporate other technical analysis tools such as resistance level, support level, volume, moving average etc. to make a better and informed decision on their trading strategy.
How to set up RSI in Trading View Chart
If you are trading on crypto exchanges, most likely you are going to be using a Trading View chart.
To set up the RSI in the Trading View Chart, you will need to:
1. Click on the button, Indicators, and search for RSI.
2. To make changes to the range values and UI of the graph, click on the Format icon next to the RSI value
3. Determine the number of days you want your RSI to show. 14 days is the industry standard.
4. Click Style to explore the design changes and most importantly to set up the RSI value ranges. In the following picture, you will be able to see that we have set ours with 30% and 70%.
3 Reasons Why RSI Is Important in Trading
1. TRENDLINE APPLICATION
RSI and closing chart have similar pattern and trend lines. This makes it useful for traders to confirm and support their predictions or assumptions with one and the other.
2. Pattern Breakouts
In the following visual, the trendline of the closing chart is signifying that the price could potentially be dropping further (where the blue arrow is pointing). However, in the RSI chart, although there has been a trendline of lows, the RSI value is still above 25%.
Also, the RSI has shown that the RSI trendline has been tackling the resistance line above 25% three times, which gives a trader a good indicator that there could be a turn in the price of the asset downtrend.
3. PRICE REVERSALS
If the RSI is not able to reach 70 on a number of consecutive price swings during an uptrend, but then drops below 0, the trend has weakened and could be reversing lower.
The reverse is true for a downtrend. If the downtrend is unable to reach 30 or below and then rallies above 70, that downtrend has weakened and could be reversing to the upside.