## 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

## Moving Avarages

Until now, to analyze the price trend, we have mainly talked about straight lines and figures that can be seen directly by looking at prices.

Additional instruments are oscillators, indicators and moving averages. These are tools that accept prices as input, but do not need to manually plot on the chart. Most need some input parameters that are used to calibrate their reactivity, also in relation to the timeframe used.

The first and simplest tool we will analyze is precisely the moving averages.

Moving averages can be used to filter price trends from noise (ie try to eliminate oscillations). The faster the moving average (ie the period on which it is calculated is shorter) and the more it tends to follow the trend in prices. By increasing the number of periods, instead, the short-term fluctuations are eliminated and the long-term price trend can be deduced.

A moving average calculated on too many periods of time, may cause you to lose important price changes on the spot.

Moving averages can also be used to generate operational signals of purchases or sales.
The operational signals that can be generated are the following:

• When the moving average is above the price chart, then the trend is rising;
• When the moving average is below the price chart, then the trend is going down;
• When the average is above the price chart is in doubt.

A technique often adopted is to use two averages together, in order to understand the type of trend, a faster or a slower one. At this point the operational signals are given by the crossing of the two averages:

• If the fast average rises above the slower one then it is a bullish signal;
• On the contrary, it is a bearish signal.

A possible use of intersections is with:

• 5 periods for the fast one
• 20 periods for the slow one

NB : generally speaking,  moving averages  are not very reactive to trend’s changes;

NB2: The averages are not able to recognize if you are in a lateral phase of the market, giving false signals, so they are often used with the ADX and DI indicators, which we will talk about later

In image 1 we can see an example of the application of two moving averages (20 in red and 5 periods in green) on the graph of the BTC with 1 day timeframe.

Image 1: TradingView Chart – Timeframe 1day – Example of moving averages over BTC

For example, we can see that in the last period of time the moving average in red is above the green one, which indicates that the trend is bearish. It can also be noted that i have two crossings, one (of the green that goes beyond the red one) in the uptrend phase, the other (of the red one that overcomes the green one) in the downtrend phase.

### References:

1. Gabriele Belletti, “Trading con gli oscillatori. Strategie e tecniche per il trading di precisione”, Hoepli