Crypto Glossary

Posted on September 13, 2021 in

Relative Strength Index (RSI)

When it comes to directional price movements, the Relative Strength Index (RSI) is a well-versed momentum-based oscillator that can be used to assess both the speed and the size of price movements. Essentially, when shown on a graph, the RSI gives a visual means of monitoring both the present and past strengths and weaknesses of a certain market. The strength or weakness of a security is determined by the closing prices throughout the course of a defined trading period, resulting in a dependable statistic for determining changes in price and momentum. Because of the prevalence of cash-settled instruments and leveraged financial products (the whole area of derivatives), the relative strength index has shown to be a reliable predictor of price changes in the financial markets.

What is the Relative Strength Index?

RSI stands for relative strength index, and it is a momentum oscillator that gauges the size of recent market movements. Its range is from 0 to 100. In general, it is used to identify whether an item has reached an overbought or oversold condition. When an asset’s price surpasses its intrinsic worth, whether in the short or long term, it is said to be overbought, and this is a warning indication that the asset may be vulnerable to a correction. 

Additionally, oversold indicators indicate that the selling has been excessive and that the asset is trading at a price that is lower than its inherent worth. These assets are believed to be in a position for a comeback. If the RSI fluctuates between 50 and 100, it is believed to be in favor of the bulls. If, on the other hand, the RSI is between 0 and 50, it indicates that the bears are in the driving seat of the market. A value of 50 on the RSI is considered neutral, suggesting that the bulls and bears are in a state of equal strength.

Making it easier for traders

The significance of establishing the relative strength index (RSI) of a certain asset is to determine whether it is overbought or oversold. Generally speaking, an RSI indicator with a reading of more than 70 is considered overbought. When the RSI is oversold, it might show readings that are lower than 30. Trading professionals utilize this as a signal to detect the trend of an asset’s price, as well as divergences and possible swings.

Using RSI in crypto trading

The RSI index has been around for a long time and is well-known for its dependability. As we have seen in the previous sections, the RSI can assist traders, both professional and retail, in making sound investment decisions, and when combined with divergence strategies, it almost acts as a leading indicator.

The Relative Strength Index (RSI) is an essential indicator that can assist in signaling the conclusion of a bull trend. Positive divergences and extreme readings in the overbought area can both be utilized to book profits on trades prior to the trend shifting. As a substitute for trying to predict when a trend will peak, traders, should consider selling when the relative strength index (RSI) and moving averages indicate that the trend is losing momentum.

Indicators are very subjective, and their value depends entirely on the individual trader and his or her own tastes, not on the market.

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