What is the Relative Strength Index?
The relative strength index is a momentum oscillator used by traders to measure the speed and magnitude of price movements. This allows them to see how overbought or oversold an asset is compared to historical prices.
Compared to Bollinger bands that only reveal whether an asset is overbought or oversold, the RSI is able to provide a number between 0 and 100 to indicate quantitatively how overbought or oversold an asset is.
Typically, an RSI value of 30 and below suggests that an asset is oversold while an RSI value of 70 and above suggests that an asset is overbought. As observed from the chart above, Bollinger Bands and RSI may not always give the same trading signals due to the different parameters.
Just like other technical indicators, there are no “correct” parameters for the RSI and different traders have different preferences for the RSI. For instance, some traders may prefer to use a value of 60 and 40 for overbought and oversold conditions respectively to react faster to markets but risk potentially false positives or noise in the data.
Formulation of RSI
The RSI is derived using the following formula:
Generally, the greater the average price gains over the past n periods is in comparison to the average price decreases, the greater the relative strength and RSI. This can be seen below, where a higher RS leads to a higher RSI value.
RSIs are typically derived using the past 14 periods. However, traders can decrease the number of periods to make the RSI more sensitive to recent price changes. Other popular time frames used by many traders are the 10 and 20 period RSIs.
CryptoHero uses the 14 period RSI along with the 70/30 levels to help traders automate their cryptocurrency trading.
Apart from the number of periods used in the RSI calculation, the time period used also matters. For example, an overbought signal from the RSI indicator on a daily chart is a stronger signal than an overbought signal on the 15 min chart.
Trading with RSI
Using the RSI, traders are able to know when a cryptocurrency is overbought or oversold and predict trend reversals.
For instance, if the RSI suggests that a cryptocurrency is overbought (above 70), then gives traders a bearish signal. Traders expect the price to either stop increasing as rapidly or even decrease sharply. This can be seen in the chart above where prices decreased after the RSI rose above 70 (red arrow).
Conversely, if the RSI suggests that a cryptocurrency is oversold (under 30), then it provides a bullish signal. Traders expect that there will be a reversal in the price trend (no longer decrease) and prices are expected to rise. This can also be seen in the image above where prices started increasing after the RSI fell below 30 (orange arrow).
However, it should also be noted that the RSI is an indicator of price momentum and not necessarily price trends. The RSI may indicate that an asset is overbought, but that does not guarantee that trend reversal.
In the chart above, it can be seen that the RSI provided numerous indications that Bitcoin was overbought during the period. However, instead of a trend reversal, it remained overbought and the price of Bitcoin continued to rise.
Using RSI on CryptoHero
The RSI is one of the technical indicators that traders can use on CryptoHero to help them automate their cryptocurrency trading without any coding knowledge. By connecting an exchange account to CryptoHero, users can simply select their position on our current cryptocurrency pairs and begin automated cryptocurrency trading with RSI as seen below.
Apart from just using RSI to automate trades, CryptoHero allows users to use technical indicators in conjunction with one another. In the example above, the bot was able to use either RSI OR Bollinger Bands to enter trade positions with a 5% take profit trading ADA/USDT.
The backtested results were significantly improved when the RSI indicator was used in conjunction with a Bollinger Bands trading strategy.
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