When we think about investing in all kinds of assets, we very often start looking for tools that will help us understand or predict specific movements on the charts. Today we want to introduce you to the RSI – an important indicator that will help you in technical analysis.
What is RSI?
Relative strength indicator The Relative Strength Index (RSI) was first presented by J. Welles Wilder in the Commodities journal in June 1978.
In the simplest terms, the RSI can be defined as an oscillator that determines the strength of a trend in technical analysis. This index is measured in values from 0 to 100. Traditional interpretations indicate that RSI values above 70 points suggest that a given security is overvalued. This has a chance to reverse the current trend. Similarly, values below 30 indicate that the asset is undervalued.
How to calculate the RSI?
We calculate the oscillator based on the following formula:
a – average value of the increase in closing prices on y days
b – average value of the decline in closing prices on y days
Remember that the shorter the period, the more sensitive the oscillator and the wider its amplitude. The relative strength indicator itself works well when its oscillations reach the lower and upper extremes. Typically, data from 14 periods are used to calculate the RSI. The result of our oscillator is very often found under the chart, where we can directly compare it with the current price of a given asset.
As you can see in the image above, the oscillator can stay in the revaluation sector for a long time, even when the asset is trending upwards. Similarly, the value of the indicator may remain below 30 points, even if we have been in a downtrend for a long time. It can help new traders to understand these complexities by increasing their knowledge of the dominant trend.
What can the oscillator tell you?
The RSI may prove to be a useful indicator supporting building an investment strategy. Let us remember that technical analyzes do not always work on the cryptocurrency market. Nevertheless, when investing with leverage on margin trading platforms (such as BitMEX or the Polish platform Geco.one), it is good to use all the tools available to improve our strategy.