Lesson 1: RSI (Relative Strength Index) - Widely used indicator
Welcome to the first lesson from Lets Go Crypto! We aim to educate people who are struggling to understand indicators, and how to use them when it comes to trading. Hope this is helpful for all of you people out there, who are looking for some kind of lessons. If at the end, you do not understand or have any questions, feel free to ask in comments below.
Today, we will be talking about RSI (Relative Strength Index), which is one of the most used indicators in crypto. There are many people out there who just use RSI to day trade, or even for a long term trading. Here you will learn what is RSI, the Pros and Cons of RSI, how to use it to trade, and the best strategy to follow if you are only using RSI as an indicator. I will be using 4H time frames as an example for the lesson. Lets dig straight into it.
Default RSI indicator Settings: Length (14) .
What is RSI?
Relative Strength Index is one of the many oscillators out there, which basically calculates the strength and weakness of a coin. It compares the up movements versus the down movements over a given period of time. As you can see on the chart, RSI is plotted as a single line. That line when average gains are greater than the average losses, it moves up, and vice-versa when average losses are greater than average gains, the line declines. It is as simple as that. It basically takes into account, the speed and change of price movements.
How do we use RSI?
Using the average gains and losses that RSI calculates, a ratio is created, which makes the line move between 0% to 100% borders. Technically in the crypto world, we have our borders placed at 70% and 30% as you can see in the chart. (Some people also prefer using 80% when its bull market and 20% when its a bear market).
If we see RSI nearing or crossing 70% line, that means that the coin is overbought.
If we see RSI nearing or crossing below 30% line, the coin is in the oversold zone.
When RSI is above 70, that means that a coins' price has been increasing for that period of time, and is not in the overbought zone, which means it could be due for a correction.
When the indicator is below 30, it shows a strong run lower which might be losing momentum, and the price may be due for a rally upwards.
This is not at all hard to understand. I hope everyone is on the same page so far. Make sure you understand this bit.
RSI > Price increasing > If nearing 70 or above > Overbought > (We might see some downward movement)
RSI > Price decreasing > If nearing 30 or below > Oversold > (Price might start going back up)
Easy peasy! Its always easy until it comes to applying it to trading right? Lets have a look at that as well. I am sure after this and a little bit of practice you will be able to use this indicator with full confidence.
Applying RSI in trading
Just spend a minute looking at the chart for me really carefully and match the price action with the RSI movement. You will see that it is very similar. When the price is going up, RSI is going up, and when the price is going down, so is RSI.
When to Buy?
Scenario 1: So we know that when RSI is low (less than or equal to 30), it is oversold, and that usually means that the coin can rally up soon. Our aim should be buying in when RSI is low. So if it has crossed below 30%, wait to buy in until it comes above 30, that is just a confirmation that the trend is changing to bullish. It simple. Read this one more time.
Scenario 2: There is one more situation when it is not necessary to wait for the RSI to go below 30, but be careful with this one. This is called a bullish divergence. It occurs when RSI makes a higher low while the price makes a lower low. The more times this occurs, the more bullish it is considered for a coin. I will be explaining Higher Lows, and Lower Lows for those who do not understand it. Since I am getting out of words here because of the limit, continue reading below..........
Today, we will be talking about RSI (Relative Strength Index), which is one of the most used indicators in crypto. There are many people out there who just use RSI to day trade, or even for a long term trading. Here you will learn what is RSI, the Pros and Cons of RSI, how to use it to trade, and the best strategy to follow if you are only using RSI as an indicator. I will be using 4H time frames as an example for the lesson. Lets dig straight into it.
Default RSI indicator Settings: Length (14) .
What is RSI?
Relative Strength Index is one of the many oscillators out there, which basically calculates the strength and weakness of a coin. It compares the up movements versus the down movements over a given period of time. As you can see on the chart, RSI is plotted as a single line. That line when average gains are greater than the average losses, it moves up, and vice-versa when average losses are greater than average gains, the line declines. It is as simple as that. It basically takes into account, the speed and change of price movements.
How do we use RSI?
Using the average gains and losses that RSI calculates, a ratio is created, which makes the line move between 0% to 100% borders. Technically in the crypto world, we have our borders placed at 70% and 30% as you can see in the chart. (Some people also prefer using 80% when its bull market and 20% when its a bear market).
If we see RSI nearing or crossing 70% line, that means that the coin is overbought.
If we see RSI nearing or crossing below 30% line, the coin is in the oversold zone.
When RSI is above 70, that means that a coins' price has been increasing for that period of time, and is not in the overbought zone, which means it could be due for a correction.
When the indicator is below 30, it shows a strong run lower which might be losing momentum, and the price may be due for a rally upwards.
This is not at all hard to understand. I hope everyone is on the same page so far. Make sure you understand this bit.
RSI > Price increasing > If nearing 70 or above > Overbought > (We might see some downward movement)
RSI > Price decreasing > If nearing 30 or below > Oversold > (Price might start going back up)
Easy peasy! Its always easy until it comes to applying it to trading right? Lets have a look at that as well. I am sure after this and a little bit of practice you will be able to use this indicator with full confidence.
Applying RSI in trading
Just spend a minute looking at the chart for me really carefully and match the price action with the RSI movement. You will see that it is very similar. When the price is going up, RSI is going up, and when the price is going down, so is RSI.
When to Buy?
Scenario 1: So we know that when RSI is low (less than or equal to 30), it is oversold, and that usually means that the coin can rally up soon. Our aim should be buying in when RSI is low. So if it has crossed below 30%, wait to buy in until it comes above 30, that is just a confirmation that the trend is changing to bullish. It simple. Read this one more time.
Scenario 2: There is one more situation when it is not necessary to wait for the RSI to go below 30, but be careful with this one. This is called a bullish divergence. It occurs when RSI makes a higher low while the price makes a lower low. The more times this occurs, the more bullish it is considered for a coin. I will be explaining Higher Lows, and Lower Lows for those who do not understand it. Since I am getting out of words here because of the limit, continue reading below..........
Comment:
Limitations of RSI:
For those who are familiar with RSI, you all have encountered that sometimes when the price keeps going up RSI remains in the overbought zone for a very long time or when the price keeps going down it remains in the oversold zone for a very long time. Again, if the momentum of price remains strong in the upward direction, it will remain in the overbought zone (70 and above) for a long time. If the momentum of price remains strong in the downward direction, RSI will remain in the oversold zone (30 or below) for a long time. That why above I recommended you to buy/sell when you have a confirmation that the price is going up/down. You get a confirmation usually when you let the candle close, and RSI is pointing in a specific direction, or when the RSI crosses back in from the oversold zone, or the overbought zone.
When RSI may be dropping and price rising, that doesn't mean the price is gonna fall, it just means that the price is increasing at a slower speed than earlier. Some people also buy in when RSI reaches 40, and ride it up till it reaches 70-80. Everyone has different trading rules for them. So make sure, you get a confirmation first before you plan any trades. Use RSI for trades that you can see that it is pretty low (30 or below), wait for the candle to close and confirm that the RSI is pointing towards the up, or wait another candle to be sure, and then buy. Same when it comes to selling. Wait for the RSI to give a confirmation of a bearish trend, and once you see it is pointing to the downside after the candle close, you can sell it, or you can even sell it up top when you are comfortable.
When the above situation happens, some other sort of confirmation is still needed for the reversals. In such cases, I would recommend using another indicator with is MACD (Moving Average Convergence Divergence). It is another indicator that is widely used by people along with RSI. Both indicators when used together can do wonders. We will go over MACD in Lesson 2 which I will be posting it soon.
I hope this lesson was helpful for you. Please don't hesitate to ask question in the telegram group below or ask any question in the comments. I will be active enough to answer them whenever I can.
Since this was my first lesson, I would like to know whether it was helpful or not, and also any suggestions you might have for me. This will ensure a better quality of lessons in the future.
For those who are familiar with RSI, you all have encountered that sometimes when the price keeps going up RSI remains in the overbought zone for a very long time or when the price keeps going down it remains in the oversold zone for a very long time. Again, if the momentum of price remains strong in the upward direction, it will remain in the overbought zone (70 and above) for a long time. If the momentum of price remains strong in the downward direction, RSI will remain in the oversold zone (30 or below) for a long time. That why above I recommended you to buy/sell when you have a confirmation that the price is going up/down. You get a confirmation usually when you let the candle close, and RSI is pointing in a specific direction, or when the RSI crosses back in from the oversold zone, or the overbought zone.
When RSI may be dropping and price rising, that doesn't mean the price is gonna fall, it just means that the price is increasing at a slower speed than earlier. Some people also buy in when RSI reaches 40, and ride it up till it reaches 70-80. Everyone has different trading rules for them. So make sure, you get a confirmation first before you plan any trades. Use RSI for trades that you can see that it is pretty low (30 or below), wait for the candle to close and confirm that the RSI is pointing towards the up, or wait another candle to be sure, and then buy. Same when it comes to selling. Wait for the RSI to give a confirmation of a bearish trend, and once you see it is pointing to the downside after the candle close, you can sell it, or you can even sell it up top when you are comfortable.
When the above situation happens, some other sort of confirmation is still needed for the reversals. In such cases, I would recommend using another indicator with is MACD (Moving Average Convergence Divergence). It is another indicator that is widely used by people along with RSI. Both indicators when used together can do wonders. We will go over MACD in Lesson 2 which I will be posting it soon.
I hope this lesson was helpful for you. Please don't hesitate to ask question in the telegram group below or ask any question in the comments. I will be active enough to answer them whenever I can.
Since this was my first lesson, I would like to know whether it was helpful or not, and also any suggestions you might have for me. This will ensure a better quality of lessons in the future.
Comment:
I noticed that the chart did not come up the way I wanted to, so here is how I wanted it to look like:
Higher Lows:
www.realfibonaccitra.../uptrend-300x300.png
Lower Lows:
www.realfibonaccitra...013/04/downtrend.png
So this was when do we buy using RSI. I hope it was pretty straightforward, and you all are following well so far. Now lets look into when to sell.
When to Sell?
Scenario 1: We know that when RSI is high (more than or equal to 70), it is a signal that the price can start a downtrend anytime unless there is a breakout, then RSI can go up to 100. Again as we did when buying, wait till the candle closes, and RSI is pointing downwards, which gives us the confirmation that the trend is reversing. Safe traders usually buy when RSI is low, and sell when it gets to 70, or 80, and sometimes even before that if they are in good profit.
Scenario 2: A coin is considered to be bearish when RSI makes a lower high, while the price makes a higher high. Again, the more times it occurs, the bearish the signal is. Refer to the images above, for Higher Highs, and Lower Highs.
Remember for bearish, it is RSI: Lower High, and Price Chart: Higher High. For Bullish, it is RSI: Higher Low, and Price Chart: Lower Low.
Hope you got this part really well.
So now we know when to buy and when to sell using RSI. It does look really easy doesn't it? It will require some practice, so I would suggest, when you are practicing, practice with very less BTC, lets say 0.001 or 0.002. This way you will learn to use the indicator, and if you go wrong with this, you won't lose a lot as well.
RSI alone can do wonders, but it does have some limitations as well. Sometimes it can give mixed signals. Lets go over that now.
Continue reading below, since I am getting out of word limits..