Using RSI while trading

lbi-token (74)in LeoFinance • 3 years ago

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RSI

No, I am not talking about the Repetitive Strain Injury here, although you may also experience that if you sit at your PC all day and click your mouse frantically, hoping to be on time with your order. Before you know it you have missed the boat and instead of a profit you have a loss.

But the RSI I'm talking about here is a technical indicator you can use to learn to predict which way the price of a cryptocurrency will go. Yes it is possible to see this in advance. No one can give you a 100% guarantee, not even technical indicators, but as the name implies, it is an indication. And to learn to trade properly, this RSI indicator is an important one to understand so that you can keep an eye on it and make serious profits.

Strong or weak movements

The RSI indicator indicates how strong or how weak a movement in the price change is. For example, if Bitcoin is moving from $55,000 to $56,000, it is a weak move. Then this is an indication that the trend is unlikely to go up any further, but may actually reverse. Likewise, of course, when the price goes down. If this is a weak movement, the price will not fall very hard and there is a chance that consolidation will follow soon after which the next up or down movement will come. Using an RSI indicator can help you to see this coming and therefore to anticipate it! But as said before, you will have to understand how it works. And unfortunately this is not always easy. But hey, if we want to see money, we'll have to work for it ... with or without our brains.

With the RSI indicator you can view the strength of such a movement and thus foresee whether a trend will continue or will reverse.
To understand even better what the RSI exactly means, it is useful to understand the following definitions:

Leading indicator - this is a trading indicator designed to detect future price movements before they happen. These can ensure that you enter a profitable trade rather than a "Lagging indicator."
Momentum oscillator - this is a leading indicator that can predict any trend change.

The RSI = a momentum oscillator that measures the speed and change of price movements. The faster the change of a price movement, the more powerful it is and the more likely it is that the market will continue to move in this direction. The weaker this movement, the more likely the trend will reverse.

Very important indicator

To fully understand what this indicator measures, what it does, and how you can use it, we'll have to dive into the formula. And I apologize in advance, because this can be a tough dry piece. But nevertheless necessary to understand if you want to trade for serious profits. However, you should keep in mind that while this is a very important indicator, this is only ONE indicator, and it is still important that you can read the candles and recognize chart patterns. I will come back to the map patterns later.

So grab a cup of coffee to make sure it is all less dry. But here we go.

Formula RSI

The formula to calculate the RSI is always based on the LAST days. The number of days you want to use also influences what your RSI will look like. The most commonly used number of days is normally 14. But this is not a standard given of course. Although, it is recommended to use 14.

To understand the formula properly and to be able to apply it yourself, you need the following definitions. Feel free to read it 85x to understand… Again, this is important to understand. If you're not a math genius like me, it may take a while for it to sink in. LOL

First Average Profit = [the sum of all winnings during the profitable days] / [the number of days (14)
First average loss = [the sum of all losses during the loss-making days] / [the number of days (14)]
Average profit = [(previous average profit) * (number of days - 1) + current profit] / [number of days (14)]
Average loss = [(previous average loss) * (number of days - 1) + current loss] / [number of days (14)]
RS = [Average Profit] / [Average Loss]

With all these formulas you can eventually make the formula for the RSI:

RSI = 100 - [100 / (1 + RS)]

Congratulations if you've stuck this far, AND if you really understood this dry formula. And now for the good news,

you can keep it somewhere in the back of your mind because we are happily living in a computer age where these technical indicators are simply present for us on all major exchanges,

Which take the calculations off our hands. If you feel the need to control it yourself then the formula is here, and you can get started. If you have time to spare, go back to the Bitcoin peak of 2017, look up all the information and try to calculate and check the RSI formula. This could help you understand it even better, but ... this is only recommended if you have a lot of time to spare.

What is important to know about the RSI, the figure that comes from this formula calculation is always between 0 and 100. And there is an important fact. Because a cryptocurrency from and above RSI of 70 is seen as OVERBOUGHT, and an RSI below 30 is seen as OVERSOLD.

How can you make money from this?

If a cryptocurrency has an RSI of over 70, you could expect that a rising trend will no longer continue for very long and will be reversed. So not a wise time to buy. But statistically a good time to sell. If a cryptocurrency has an RSI of under 30, it is 'oversold', and you could expect the downward trend to reverse, so that will give the green light to buy this cryptocurrency correctly.

OVERBOUGHT means that the cryptocurrency has risen in price too much in too short a time and that the price could drop again at any time. Now is likely the best time to sell your cryptocurrency.

OVERSOLD means that the cryptocurrency has fallen in price too much in too short a time and that the price can rise again at any time. Now is likely the best time to buy this cryptocurrency.

Be Careful!

Paying attention to this is the simplest way to make money from this principle. But… yes of course there is one, but you have to be careful with this that you never use this RSI indicator as the only means. Because it is by no means a watertight strategy. So always only use this in combination with other indicators. Using one indicator is not going to make you profit. That is something you should keep a close eye on. A cryptocurrency can have an RSI of 80 and still fly like a rocket. Then you are quite disappointed if you decide to sell your crypto based on this RSI. So don't!

Next week, next indicator!

There are more technical indicators available that also relate to the RSI, but I will only get to that next week… Because I must first have absorbed that part in my brain. So you just do your thing, save this somewhere in the back of your mind ... take a look at the exchanges at the technical indicators and observe what you see.

Observing what I'm learning

That's how I go about it, try to absorb it, and then observe. But above all, do not make decisions based on this information. Certainly not as long as I cannot yet use all indicators in combination, it will mainly remain an emotional issue. And that sometimes works out better than other times. Especially my own emotions turn out to be the biggest bummer ...

I am learning step by step… but it doesn't get any easier the more you learn.

Wishing you all a good day, and I'll be back tonight ... For now I am going to enjoy the spring temperatures outside with the dogs in our small Netherlands, and together with my partner I will put together a garden shed that is the first start for our own project for hopefully a better future.

And last but not least ... DO YOUR OWN RESEARCH, I AM NOT A FINANCIAL ADVISOR