Hello, market enthusiasts!
In previous post, we described a group of technical indicators - Oscillators, providing a solid foundation for today's discussion on RSI. The Relative Strength Index (RSI), developed by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements.
Calculating RSI:
RS = Average of x days' up closes / Average of x days' down closes
RSI = 100 - (100/(1+RS))
Interpreting RSI:
RSI is plotted on a vertical scale of 0 to 100. Movements below 30 are considered oversold, and movements above 70 are considered overbought. In trending markets, it is common to adjust the conditions to 80 and 20, respectively.
In the book "Technical Analysis of the Financial Markets," John J. Murphy describes the scenarios where RSI holds the greatest potential.
"In my personal experience with the RSI oscillator, its greatest value lies in identifying failure swings or divergences that occur when the RSI is above 70 or below 30. Let's clarify another crucial point regarding the use of oscillators. In any strong trend, either up or down, an extreme oscillator reading typically appears sooner or later. In such cases, claims that a market is overbought or oversold are usually premature and can lead to an early exit from a profitable trend. In strong uptrends, overbought markets can remain overbought for an extended period. Just because the oscillator has moved into the upper region is not a sufficient reason to liquidate a long position (or, even worse, short into a strong uptrend)."
Failure Swings:
Failure swings can help us identify trading triggers. These occur when the RSI is above 70 or below 30. A top failure swing happens when the RSI (above 70) fails to exceed the previous peak in an uptrend, followed by a downside break of the previous trough. The opposite applies to a bottom failure swing.
Now, let's shift our focus to the BTC/USD chart:
Today, we are analyzing the price movements of BTC/USD on a 4-hour timeframe. The range marked with the blue lines represents last week's trading range. The current RSI value is approximately 75 (indicating overbought conditions), and the price has just broken the previous week's range high. Given the current price action, we should be vigilant for potential setups:
If the price remains above the previous week's high and the RSI remains in the overbought area, we could watch for:
a. A robust trend in which both price and RSI continue to ascend.
b. The potential setup of a "top failure swing," which would occur if the price rises further, but the RSI fails to surpass the previous peak in an uptrend, followed by a downside break of the previous trough. Signaling to exhaustion of the trend.
If the breakout turns out to be a false breakout or a fake-out:
c. A retracement to the range low with the RSI in the oversold area.
d. A breakout below the range low and a bottom failure swing.
e. Sideways price action in the previous week's range.
f. other
For the purposes of this post, we've highlighted some of the setups we discussed theoretically in today's post. Keep in mind that each of these setups takes time to unfold. Additionally, note that in trending markets, claims that a market is overbought or oversold are typically premature and can result in an early exit from a profitable trend.
Please let us know which option you find most likely. Additionally, share which method of using RSI has proven to be the most effective in your trading strategies.
In previous post, we described a group of technical indicators - Oscillators, providing a solid foundation for today's discussion on RSI. The Relative Strength Index (RSI), developed by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements.
Calculating RSI:
RS = Average of x days' up closes / Average of x days' down closes
RSI = 100 - (100/(1+RS))
Interpreting RSI:
RSI is plotted on a vertical scale of 0 to 100. Movements below 30 are considered oversold, and movements above 70 are considered overbought. In trending markets, it is common to adjust the conditions to 80 and 20, respectively.
In the book "Technical Analysis of the Financial Markets," John J. Murphy describes the scenarios where RSI holds the greatest potential.
"In my personal experience with the RSI oscillator, its greatest value lies in identifying failure swings or divergences that occur when the RSI is above 70 or below 30. Let's clarify another crucial point regarding the use of oscillators. In any strong trend, either up or down, an extreme oscillator reading typically appears sooner or later. In such cases, claims that a market is overbought or oversold are usually premature and can lead to an early exit from a profitable trend. In strong uptrends, overbought markets can remain overbought for an extended period. Just because the oscillator has moved into the upper region is not a sufficient reason to liquidate a long position (or, even worse, short into a strong uptrend)."
Failure Swings:
Failure swings can help us identify trading triggers. These occur when the RSI is above 70 or below 30. A top failure swing happens when the RSI (above 70) fails to exceed the previous peak in an uptrend, followed by a downside break of the previous trough. The opposite applies to a bottom failure swing.
Now, let's shift our focus to the BTC/USD chart:
Today, we are analyzing the price movements of BTC/USD on a 4-hour timeframe. The range marked with the blue lines represents last week's trading range. The current RSI value is approximately 75 (indicating overbought conditions), and the price has just broken the previous week's range high. Given the current price action, we should be vigilant for potential setups:
If the price remains above the previous week's high and the RSI remains in the overbought area, we could watch for:
a. A robust trend in which both price and RSI continue to ascend.
b. The potential setup of a "top failure swing," which would occur if the price rises further, but the RSI fails to surpass the previous peak in an uptrend, followed by a downside break of the previous trough. Signaling to exhaustion of the trend.
If the breakout turns out to be a false breakout or a fake-out:
c. A retracement to the range low with the RSI in the oversold area.
d. A breakout below the range low and a bottom failure swing.
e. Sideways price action in the previous week's range.
f. other
For the purposes of this post, we've highlighted some of the setups we discussed theoretically in today's post. Keep in mind that each of these setups takes time to unfold. Additionally, note that in trending markets, claims that a market is overbought or oversold are typically premature and can result in an early exit from a profitable trend.
Please let us know which option you find most likely. Additionally, share which method of using RSI has proven to be the most effective in your trading strategies.
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This post does not offer personal investment advice or recommendations. Bitstamp accepts no responsibility for any damage or loss from the utilization of the information presented here.
This post does not offer personal investment advice or recommendations. Bitstamp accepts no responsibility for any damage or loss from the utilization of the information presented here.