Relative Strength Index (RSI)

The Relative Strength Index (RSI) is one of the most important overbought / oversolded oscillators. Compared to the simple use of averages is much more responsive and allows us to understand in a more timely manner where prices will go.

The operational signals occur when the value of the RSI exceeds the minimum or maximum preset level, that is:

  • If we exceed the maximum level we are overbought : this suggests that the price could start to fall;
  • If we exceed the minimum level we are oversold : this, on the contrary, suggests that the price may start to rise;

It should be noted that these are suggestions that must then be reflected in the prices: it may indeed be that the price remains for a long time in a phase of overbought / oversold.

It is calculated as follows (source Wikipedia):

RSI = (100 * U) / (U + D) where 
U = average of the upward closing differences of X elements; 
D = mean of the absolute value of the closing down differences of X elements;

The parameters that we suggest to use with cryptocurrencies are as follows:

  • Period: 5
  • Minimum level: 30
  • Masism level: 70

NB: these are not the standard values ​​usually used for this oscillator, but for cryptocurrencies, whose prices evolve very quickly, we found ourselves well with these values ​​to have a more reactive oscillator;

In case of very low timeframe it is recommended to lower to period 2.

The period is trivially the number of units (the X of the formula) on which the averages are calculated. For example if we are on timeframe 4h and the period is 5 we take into account 5 elements of the 4h chart.

In image 1 we can see an example of the RSI used on the BTC / EUR chart with a 1 day timeframe:

Image 1: TradingView – RSI on BTC / EUR chart with 1 day timeframe

It should be noted that the minimum and maximum points of the graph often coincide with the value of the RSI. However, seeing it in the past is very simple, to interpret it while it is formed requires instead to find a feedback on prices and to place the appropriate stop loss / stop buy.

References:

  1. Achille Fornasini, “Mercati finanziari: scelta e gestione di operazioni speculative – I metodi e i sistemi della moderna Analisi Tecnica a supporto delle decisioni operative”, 1th edizione del 1996, ETAS
  2. Wikipedia
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