The Relative Strength Index, better known as RSI, is another widely known technical analysis indicator in cryptocurrency trading platforms due to its usefulness in studying the properties of an asset's upward movements.
El technical analysis indicator RSI (Relative Strength Index) o Relative Strength Index, is an indicator widely used in the technical analysis of markets. This indicates the relative strength of bullish movements, compared to bearish movements. It was designed by J. Welles Wilder and published in Commodities magazine in 1978.
The function of this tool is to indicate to what extent the price of an asset rises or falls in a given time. Currently it is one of the most widely used indicators in trading software and with great applicability in cryptocurrency trading.
How does the RSI indicator work?
This indicator works as an oscillator, that is, as an analysis and projection tool for two moving averages; one short and one long. To do this, it is based on the application of a mathematical formula.
RSI = 100 - [100 / (1 + RS)]
Where:
RSI is Relative Strength Index y RS is Initial Relative Force.
La initial relative force (RS), is a arithmetic mean of the gains or losses obtained in a given time interval. And its result is obtained by dividing the average profit by the average loss.
The classic configuration of the RSI is determined in periods of 14 days, and is expressed in a minimum range of 0 to a maximum range of 100. Where, on the recommendation of its creator, rank 30 is considered as over-sale and range 70 as over-purchase. Thus, if the value of an asset rises consecutively for 14 days, the average loss is considered to be 0. Therefore, the RSI has a value of 100. Conversely, if in a period of 14 consecutive days prices go down, it is considered an average profit of 0. And therefore, the RSI has a value of 0.
In the same way, if a value grows from below exceeding the range 30, it is considered in bullish or increasing action. Conversely, if a value falls from above below the 70 range, it is considered bearish or declining. So if the RSI is above 70 we talk about buying, and if it is below 30 we talk about selling
However, this setting can be adjusted as required. If the calculation period becomes shorter, the indicator becomes more sensitive, and therefore reaches extreme levels faster. Quite the opposite occurs if the period becomes longer. Where the volatility of the indicator becomes less.
Indicator utility
This indicator is commonly used by market operators as it helps to measure the speed of price changes. As well as possible overbought and oversold levels of a cryptocurrency or cryptocurrency. What can facilitate decision-making when wanting to make or exit an investment.
Overbought and oversold levels occur when the price indicator is above or below a certain level. Like other indicators used in the stock market, bullish or bearish divergences indicate buy or sell signals, respectively.
However, the usefulness of this tool also depends on the market where it is used. When a break occurs in the trend line of the indicator, a break usually occurs in the trend line of the main graph of an asset. Thus representing a prior warning and an opportunity to anticipate the movement and determine the trend. In stock markets or with little volatility, this indicator is not very accurate, so it does not add much value. Since it is based on the prediction that the trend will have and not on the price of the asset when making decisions.
This indicator is widely used in the cryptocurrency market due to the high volatility of said market. Although its results are not always the expected ones, and the periods must be configured by some more convenient for the analysis. Therefore, the interpretation of the data must be carried out within the scope of the general action and the time horizon of the assets.