The Relative Strength Index (RSI) is a momentum indicator that measures price changes, to gauge overbought or oversold conditions in the price of a digital currency or asset. other products. The RSI is displayed as an oscillator (a line chart that moves between two extremes) and can take readings from 0 to 100. This indicator was developed by J. Welles Wilder Jr. and featured in his 1978 book, New Concepts in Technical Trading Systems (New concept in technical trading system).
The explanation of the usage of RSI is that its reading above or equal to 70 indicates that the price of , this asset is in the overbought or overvalued zone and could be the premise for a trend reversal. price afternoon. An RSI of 30 or less indicates that the price is either oversold or undervalued.
- RSI is a popular momentum oscillator developed in 1978.
- The RSI is an oscillator that tells when the market is in the overbought and oversold phase
- Identify good signal to buy, good signal to sell to take profit.
Formula to calculate RSI
U= closenow – closeprevious
D= closeprevious – closenow
(U, D only take positive values not negative values, this is why the RSI indicator only fluctuates from 0 to 100)
Use smoothed moving average (n periods) to calculate RS
RS = SMMA(U,n) / SMMA(D,n)
n in this indicator is commonly used as 14 periods.
RSI= 100 – 100/(1+RS)
Ex: Average of purchases (SMMA(U,n)) fold m times the average of sell(SMMA(D,n) then RS = m. Value of m The higher it is, the larger the RSI. This is why an RSI above 70 is called overbought, an RSI below 30 is called oversold. The number 70, 30 can change depending on the experience of each person.
closenow:close price of the current candle
closeprevious: closing price of the previous candle.
I. How to use the RSI in technical analysis.
The most basic usage of the RSI is that the RSI goes above the 70 zone and cuts it down to sell, on the contrary, if the RSI breaks down to the 30 zone and crosses it back up, then buy. Or another way to use it is that a price cut above 50 indicates an uptrend, and a cut below 50 indicates a downtrend (market trend change). Please see the illustration below for more clarity.
5. Identify new trend with zone 45-55
The zone between 45 – 55 is called the no-trend zone. Only when the price breaks out of this zone will a new trend be created. If cut to 45, it is a downtrend, if it is cut to 55, it is an uptrend.
II. Limitations of the RSI
The RSI compares bullish and bearish momentum and displays the results in an oscillator that can be placed alongside a price chart. Like most technical indicators, its signals are more reliable with long-term trends. True reversals are rare and can hardly be faulted for false forecasts. Eg:
As we can see in the picture above, the price chart shows that the following low is lower than the previous low, the RSI indicator is that the following low is higher than the previous low. As far as normal divergence is concerned, this is a good signal to buy because a reversal is possible but the price moves sideways and then resumes the downtrend. Therefore, we should combine with other indicators to increase the reliability when entering orders such as the moving average indicator MA, the GMMA indicator…
The RSI is an indicator that displays momentum so as long as an asset’s price momentum remains strong (up or down), the indicator can stay in the overbought or oversold zone for a long time. Therefore, the RSI is most reliable in an oscillating market when the price is in a trending period (up or down). This indicator is not good in the Sideway market.