Trading Cryptocurrency with Technical Indicators
There’s a realistic prospect for making steady gains against the cryptocurrency market. We know this market is young, the more that digital coins are used for utility, the more value the major coins will have. We’re now seeing big fortunes being made and new ways of using crypto. The world’s financial masters have also adapted.
Joining the growing trend and getting a piece of the potential riches starts with a strategy. Trading is an intricate science, and you’ll need the right tools to make your strategy work. The many chart patterns, trendlines, and platforms all need confirmation for peak results.
If you’ve been trading without great accuracy, consider confirming your trades with the RSI indicator. Knowing the underlying force behind the price movements of digital currencies requires help. Let’s take a closer look at how RSI can help improve your trading and potentially bring you well into the profiting trends of cryptocurrencies.
If you’re unfamiliar with Technical Analysis we wrote an in-depth article about how Technical Analysis can Enhance Your Crypto Trading.
Where Does the RSI Come From?
Relatively is the driving force behind the origin of this index. It’s easy to look at prices when set still on a price chart. Things change entirely when looking at those same Bitcoin, Ethereum, and NEO prices as they change live. The RSI was created in 1978 by J. Welles Wilder and uses the differences in upward and downward changes to find oscillating patterns.
Its sense of relativity is derived from prior price-points. The calculation takes into account a 0-to-100 scale to show the relative positioning of prices. What seems like a downtrend can suddenly turn into an upward rally without notice. The RSI helps by showing you the likelihood of price changes or of prices remaining the same.
How Does the RSI Work?
This indicator works through a set range of three basic points that are found with most trading platforms. These points fall within the common scale of 0-to-100 in order to establish comparisons. That analysis is designed to appear alongside your live trading chart. The relative strength index is usually placed at the bottom of your price-chart for any time-period you choose.
Taking a quick look at prices and then the RSI will allow you to gain a better perspective of the relativity in price movements. Here are some points that help to build that perspective:
- A Scale Between 0-to-100: Oscillation is key to how this indicator works. Think in terms of a pendulum that sways back and forth as a process. Relative strength has gained popularity because it captures the true nature of price movements that go back and forth between buying and selling. Think of what happens when prices make drastic changes.
A sudden upward move will reach a point where those holding a cryptocurrency will want to sell it. This is why it’s best to avoid entering after a sudden move when those price moves are extreme. You want to enter prior. The same is true for falling prices. Prices that fall suddenly show a condition where more buyers are brought in.
The reason for this is that prices are cheaper; some traders have also shorted the asset and want to take-profit by putting in a buy order to close their position out.
- 30, 50, and 70 Ranges: The 30, 50 and 70 marks come from the fact that the RSI is an oscillator. Oscillators do what their name implies; they oscillate from one range to the other and then back again. The two major trends of buying and selling are the major oscillations with 50 being marked as the midline in the RSI.
Since the relative strength index moves from 0-to-100, 30 is found on the bottom half of the indicator with 70 found on the upper half. These ranges help traders to find the difference between current price moves and the relative points charted on the RSI.
- 21 and 14 days: The charted line on an RSI follows price movements based on the period you set. The most common setting is for a 21 or 14-day period. This means that the data charted in the RSI is based on the prior 21-days if that’s what you have set.
A daily chart of candlesticks allows you to see what the price move was for the past 21 bars on your chart. These daily prices should closely fit with the RSI day-period as they are closely identical within timeframes. The shorter your RSI timeframe is, the more sensitive the actual graph in the RSI will be.
- Color Coding: Some traders color-code their RSI. This is often done based on the positioning you to take with an asset. In most cases, the upper 70 or more range is coded as red, which would mean a sell when reached. The lower 30 and below range is then coded as green to indicate a buying opportunity when prices fall within that range.
Why is this Indicator Important?
Cryptocurrencies have gained so much popularity that large movements can be made by individual and grouped investors who have entered the market. These entities can enter to make drastic changes that few people can determine by looking at prices alone. Here’s where the RSI helps:
- Timing is Everything: Getting in at the right time means a great deal. If you’ve often found yourself buying right when prices fall or shorting right when prices rise, then your timing is off.
- Confirmation: You might have a hunch about how prices are about to move or what the current conditions actually are. The RSI can help you to confirm your analysis.
- Divergence: Sudden changes in the market happen when price data and the RSI conflict. A divergence is found by creating trend-lines within your price chart and the RSI. A divergence occurs when price-lines go in one direction and the RSI-line goes in another. Here’s an indication of a potential change, so watch closely.
How to Make Effective Analyses with the RSI
Your daily use of the RSI will boil down to verifying the buying and selling sentiment of the market. It’s clear; you can’t always look at a chart to identify the entire trend, so finding the sentiment behind that trend lets you gather more data when finding cryptocurrency trades.
- Overbought: Overbought conditions essentially mean that the bulls have caused prices to rise in a way that the market doesn’t fully support. This could be due to a superficial belief in values but not a strong market condition behind it. You can define overbought prices when the RSI reads at or above the 70 point within its scale of 0-to-100.
- Oversold: False conditions can also happen when prices fall rapidly, and the result is an oversold state. This can be identified when the RSI reads at 30 or below.
- Bearish and Bullish Strides: If prices can stay balanced below 70 but above 50, then it results in a bullish condition where prices are likely to remain in an upward trend. The balance of prices above 30 but below 50 will sustain a bearish sentiment that’s likely to keep prices down.
Making the most of the RSI is about confirmation and sentiment. Data is important for making informed decisions with, and the RSI is an indicator that many traders can use without cluttering their screens or overloading them with information. Consider diversifying your data sources and confirming your hunches. The RSI is a great place to start and could be a way to get a competitive edge over the market.