author: collaborator date: February 17, 2022
summary
- ROI is an indicator that measures the momentum and speed at which an asset’s price is moving.
- ROI calculations: ROI value >70% = overbought, ROI value <30% = oversold
the relative strength index (rsi) indicator is an indicator that measures the momentum and speed at which the price of an asset such as bitcoin (btc) is moving.
Reading: Bitcoin strength indicator
the rsi crypto indicator is used in crypto, stock, forex and other financial markets. The RSI crypto indicator is available for free to all traders at Phemex. scroll below to see demos on how to use it for successful trades.
what is rsi?
rsi is an indicator that measures the momentum and speed at which the price of cryptocurrencies is moving. RSI is one of the best indicators for cryptocurrency trading and a favorite among veteran traders. reading this indicator can be used to determine if assets like bitcoin are overbought or oversold.
The core of this indicator is based on the average price change up versus the average price change down over a given period of time.
how to calculate the rsi?
‘rs’, or relative strength, is the average of ‘n’ closes up divided by the average of ‘n’ closes down. this value is then indexed to 100 using the following formula.
rsi = 100 – (100/1 + rs)
the rsi formula used in the phemex rsi indicator
This leaves us with a value that fluctuates between 0 and 100. For this reason, this indicator is known as an “oscillator”.
The standard period setting for this calculation is 14 days based on the recurrence you select. a daily chart will look back the last 14 days, and a weekly chart will look back the previous 14 weeks, and so on.
phemex provides the best application for the rsi indicator. if you enter “rsi” in “indicators” on any chart like btc/usdt, you will get the below rsi indicator:
How To Read The RSI Indicator?
rsi overbought & rsi oversold
- ROI value >70% = overbought
- ROI value <30% = oversold
RSI values are marked in numbers. The readouts give us insights, and an asset are either “overbought” or “oversold”. RSI values of over 70 are considered overbought territory, and values below 30 are said to be oversold.
If an asset is overbought (>70), it means it is appreciating and could fall lower. if an asset is oversold (30<), it means that it is depreciating and could be reversed higher.
The application of these criteria in isolation can generate unfavorable results. instead, read on for some of the best ROI use cases to give you an edge when using it.
The indicator works best when combined with other indicators. For example, RSI with volume can tell you if the volume peaked at several points to justify the price move higher, or if it only peaked once and will crash.
stochastic vs rsi: what’s the difference?
stochrsi is a popular indicator based on the original rsi indicator. the key difference is that rsi fetches data and runs calculations based on price fluctuations in the crypto.
stochrsi is derived from the rsi indicator itself, reconfirming the rsi indicator’s calculations. the biggest difference is in the speed at which stochrsi and rsi move. stochrsi moves much faster from overbought to oversold, while rsi tends to move more slowly.
At phemex, these two indicators can be combined to give the trader a much better overview of the current price situation.
what is rsi & macd strategy?
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Moving Average Convergence Divergence (macd) is a reliable indicator available on phemex for all trading pairs. the macd, like rsi, is a momentum tracking indicator that shows the balance between the moving averages of bitcoin or another crypto.
the rsi and macd strategy is best used together. After placing the macd indicator on the chart, you can combine them to plan a trade:
What Is The Key Difference Between MACD & RSI?
the key difference between macd and rsi is that macd compares two exponential moving averages (emas) while rsi measures percentage changes in price from top to bottom. combined, they can give a strong signal when bitcoin is about to make a move.
macd is useful for a highly volatile market, and rsi tends to make a high at the 70-80 level and a low at the 30-40 level. while they are some of the most reliable indicators, they will not produce 100% accurate signals and can sometimes be misleading.
How To Understand The RSI Indicator?
1- RSI can remain overbought and oversold for quite some time.
In bull markets, we see bitcoin often remain in overbought territory without any real relief, and in bear markets, the opposite. the rsi is a momentum oscillator that can be useful to point out and make evident the periods in which the price has continued in one direction for a long time.
however, these conditions are times when this would be the norm. For this reason, the RSI could best be used as a triggering signal or warning for you to start paying attention to the trend and for other signals that it might be overextending in either direction. it’s not something to act on right away.
2- rs dictates price action.
It is important to understand how the calculation and reading of the indicator relate to the price action you are seeing. If the price has been moving in a relatively tight range for an extended period of time, the RSI is likely to be very neutral.
so any impulsive move that follows will act as an outlier and push the indicator to an extreme. this could be the breakout that leads to the sequel. you don’t want to see this as an oversold or overbought reading worth trading.
3- ROI is best applied in your most suitable trading environment
Similar to Moving Average (MA) indicators, the RSI is best applied in its most suitable trading environment. for moving averages, these are trends. Meanwhile, RSI is often best used in ranges where a drop in momentum at the extremes is one of the telltale signs of expected reversals.
Applying the RSI in a strong trending environment is one of the easiest ways to end up acting on false signals. It is quite common for traders to spot divergences in the RSI in a trending market.
what is important to understand is that all trending markets will be filled with rsi divergences due to the very normal periods of consolidation that occur after impulsive trends. these will always be read as a divergence in momentum.
how to use volume to improve your trades? see transaction volume in ranges and trends
how to use rsi indicator?
using the rsi indicator in phemex is easy. all you need to do is register an account and you’re ready to go. the indicator is free for all users.
1 enable rsi indicator.
To start using the RSI indicator, navigate to a pair like btc/usdt or eth/usdt on phemex.
The indicator is available for free to all traders. click “indicators” above the chart and search for “rsi”.
2 Use RSI as a bias/momentum context check.
If the RSI trades abovethe 50 line, we should look for confirmation in the price action that the trend is strong and possibly look for long positions. if the price trades below, we will look for confirmation that the trend is weak and look for short opportunities.
Often, we see that in an uptrend or downtrend, the line will act as a loose zone of support or resistance, and once recovered, it will indicate that the context has changed with respect to momentum . either it can recover for the first time, or suddenly it can no longer regain momentum.
3 Using divergences as a reason for a second look or confirmation of other strengths/weaknesses present.
As we said before, we must be careful with this form of application. often, in hindsight, it seems like a sure thing, but usually it’s something carefully chosen to make it look better than it is.
what does the rsi 14 mean?
The rsi indicator uses the number 14 to measure length. this means you are looking at the rsi analysis of the last 14 days or 14 weeks.
This can be changed according to the merchant’s wishes. If you want to increase the length, you can easily do so by clicking the gear icon in the top left corner and adjusting accordingly.
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in phemex’s default settings below your chart, the number “14” automatically appears next to the rsi indicator.
what is a good rsi number?
a good rsi number for shorting crypto is 70-80, while a good rsi number for longing crypto is 20-30. A trader could make profitable trades based solely on the RSI indicator using these measurements. in order to make money with cryptocurrencies, traders are taught to “buy low and sell high”. RSI can help a trader to buy and sell at the right time. The RSI indicator was specifically designed to help you time the lows and highs.
use rsi in a downtrend & an uptrend
A good RSI to buy is when it is below 40 and a good RSI to sell is when it is above 70. In the case of a downtrend, a bullish divergence is when the price makes a lower low but rsi makes a higher low. In the case of an uptrend, a bearish divergence is when the price makes a higher high but the RSI makes a lower high.
However, using the RSI for divergencesis problematic if it acts prematurely. For example, let’s say the price pushes up after being sideways for a period of time. right after the upward momentum, it starts to form a flag that shoots higher.
after the initial push, the rsi may be very overbought. while the consolidation that forms immediately after is normal, the rsi will calculate that this price action has less momentum if it does not continue upwards at the same speed as the initial momentum candle. this will always print a divergence in a trending market, be it a strong uptrend or a strong downtrend.
The action we can take from this type of momentum feedback is to use price action as an anchor point. let’s say we not only made a lower high on rsi, but now we have also lost the high that you put on the initial high on the rsi reading. only now could we have a case for a reversal. in any case, this is really just a confirmation measure.
what is an incorrect rsi number?
You should avoid selling below 40 and buying above 70. In either case, you could be panic selling or building at the peak of a bull run.
just like any other indicator, a system can be built around the rsi. after all, it is one of the most common trading indicators available.
is the rsi reliable?
rsi is among the most reliable indicators for short and long term trends. however, the rsi tends to be more accurate when it fits or matches other long-term trend patterns.
A smart trader should use the rsi indicator on day/week charts to analyze past price movements and draw conclusions about the current state of the market.
what does low rsi mean?
a low rsi means bitcoin or another crypto is being oversold. this is an excellent buying opportunity for dealers and hoarders. When bitcoin bottoms, it rarely goes below the bottom unless it’s in a deep bear market.
bitcoin has traditionally bottomed out in the 30-40 rsi range. If you are wondering what is a good RSI to buy, values in the low 30s and 40s are a great place to buy bitcoin, no matter the price. this often indicates that bitcoin is expecting a trend reversal and could gain short-term bullish momentum.
If a trader wants to improve the accuracy of their RSI indicator, they can raise their overbought setting to 80 and their oversold setting to 20. This will remove most of the market noise and help them make calculated moves.
where to find a bitcoin rsi alert?
If you want to set up alerts when the bitcoin rsi indicator makes a move, the most used site is tradingview.
tradingview allows you to add custom alerts for all trading indicators. these alerts can be sent via email or text message to a merchant. use this alert reference guide and look for the rsi indicator in tradingview to set up alerts.
You can use the phemex btc/usdt pairs in tradingview to strategize your trade on the site before opening a live trade on phemex.
Conclusion
The Relative Strength Index (RSI) indicator, like all indicators derived from price action, shows you what is already in front of you. all you are seeing is a smoothed representation of the ongoing price action. indicators make the finer details a bit more digestible and obvious.
The most important thing is that you understand how the indicator is calculated. In this way, you will be familiar not only with their strengths, but also with their weaknesses. the rsi is an excellent tool, but like all other indicators, it can give a lot of false feedback.
Before using the rsi indicator, make sure to backtest and always record data on your trading performance.
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check out our additional technical analysis to improve your cryptocurrency trading skills
- how to exit trades in profit
- use the funding rate as a sentiment indicator
- how to use the macd indicator
- what are bollinger bands?
