Good day everybody,
Welcome to CryptoGod-1's blog on all things crypto. Today we are going to continue the series on Technical Analysis and why it can be such an important asset for new or experienced traders. In this series I am covering some of the different Technical Analysis and Indicators which can be used to help determine market movement and sentiment when trading. For Part XX the focus will be on Connors RSI.
Connors RSI
Connors RSI, also known as CRSI, is a momentum based oscillator and was created by Larry Connors and the team at Connors Research. It tries to improve on the conventional RSI indicator, and is helpful for traders in identifying when an asset is in an overbought or oversold condition. It is especially useful in shorter trading timeframes. It is much more volatile that a traditional RSI and moves much faster, meaning it requires more extreme levels to be set. Unlike the Stochastic RSI which works good in choppy markers, the CRSI works best in short-term trading. The CRSI allows for a trader to construct intra-day trading strategies which are likely to have a high probability of success, while also reducing the potential of risk or loss.
Calculating Connors RSI
To calculate Connors RSI a trader needs the three components it is made up of. They are:
The first component is a simple 3-period RSI of price.
The second component is a 2-period RSI of the up/down streak length. This is the number of days in a row that an assets closing price has been higher (up) or lower (down) than the previous days. If an asset closes its price above the previous close two days in a row, then the up/down streak is +2. If it has closed below its previous close for 3 days, then its streak is -3. If it does not change price between one period and the next, then the streak is reset to 0.
The third component ranks the most recent period's price change against the price change of the other periods in the specified timeframe (100 periods by default, shown as ROC on the formula below). This is done by finding the percentage of previous price changes that are lower than the most recent one. An example of how this works is if a trader takes a 20-day timeframe, and of that 7 of those 20 days show a price change value which is lower than the current days price change, then a trader takes it as 7 / 20 = 0.35 = 35%.
Once these three components have been worked out, the trader needs to apply them into the Connors RSI formula. The formula is as follows:
CRSI(3,2,100) = [ RSI(3) + RSI(UpDown Length,2) + ROC(100) ] / 3
The outcome of the calculation will range between 0 and 100 on an oscillator chart, generally placed below the candlestick chart.
How to use Connors RSI
The CRSI is often used to identify overbought and oversold conditions in shorter trading timeframes. As the CRSI is more volatile, unlike a traditional RSI which uses levels around 30 and 70, the CRSI makes use of levels set at 90 and 10. These can be adjusted to suit a traders needs, but those are the recommended levels. For more volatile assets such as certain cryptos, a level of 95 5 can be used.
As with any other indicator which use overbought and oversold conditions, a buying opportunity emerges when the price falls below the lower level limit of 5 or 10, as it signals that the asset is oversold and the price should rise soon. Alternatively, a selling opportunity emerges when an assets price rises above the upper level threshold of 90 or 95, indicating an overbought asset which should see a reversal in price shortly.
The main rules to follow when using the Connors RSI are:
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The Connors RSI must register a reading of 10 or lower, indicating an oversold market condition. Long position signal.
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The Connors RSI must register a reading of 90 or higher, indicating an overbought market condition. Short position signal.
An example of the Connors RSI in use on a Binance BTC/USDT 3m timeframe is shown below, highlighting signals for overbought and oversold conditions. The overbought line is set to 90 and the oversold line is set to 10. The CRSI is shown as the purple oscillator line below the candlestick chart, with the 90 and 10 levels shown as dashed grey lines.
The white text highlights where the Connors RSI went above the overbought level, and soon saw a sell off after. The blue text shows where the Connors RSI went below the oversold level, and soon after the price began to rise.
Limitations of Connors RSI
While the Connors RSI can be a good indicator for overbought/oversold levels in shorter timeframes, the components used to calculate the CRSI which measure the duration of the trend and the magnitude of the price change for setting the overbought and oversold levels means it is not a good idea to used it for longer term trading.
The CRSI can also be prone to produce false signals, although despite the increased volatility in short-term trading the CRSI typically generates fewer signals than a traditional RSI. The false signals can happen when the CRSI signals for an overbought or oversold condition but the market price of the asset does not change as expected. Therefore it is important use the CRSI in in conjunction with other indicators and analysis techniques.
Conclusion on using Connors RSI for TA
As a trader, whether it be day trading or long term trading, using Connors RSI can be very beneficial in when an asset is in an overbought or oversold condition. Connors RSI is an oscillator, and is shown in a range between 0 and 100. Like with any RSI, it has specific overbought and oversold levels. These are set at 90 and 10 generally, but more volatile assets can be set at 95 and 5. Once the CRSI crosses into the overbought or oversold are it is a signal that a price reversal should be expected. It is used best in shorter timeframes, although it should be noted that like all RSI's it can produce false signals. Therefore the Connors RSI should not be used as a standalone indicator, instead it should be used in conjunction with other indicators to give stronger results and more reliable signals, especially trend indicators.
As stated whether you are experienced or new, Technical Analysis can always be a useful asset when trading. Just remember it is not guaranteed and nobody can predict the future, no matter how certain you believe the patterns to be. It is always just another tool of the trade to help make more informed decisions when trading. It can be easy to get caught into false signals with a large number volatile changes in the oscillator with a Connors RSI indicator, and it can also show an upcoming trend reversal which never takes place as part of a false signal.
It is important to use the Connors RSI along with other TA to get the correct signals for understanding the strength of a trend. While Connors RSI is best used for short time frame trading, a trader should always zoom out. Therefore if trading on a 5 minute chart check the 3 minute or 5 minute or even 10 minute chart to give you a better idea of the overall trend strength via the Connors RSI.
You can find the previous parts to the series here:
Technical Analysis - Part I - Exponential Moving Average (EMA)
Technical Analysis - Part II - Relative Strength Index (RSI)
Technical Analysis - Part III - Bollinger Bands (BB)
Technical Analysis - Part IV - Moving Average Convergence Divergence (MACD)
Technical Analysis - Part V - On-Balance Volume (OBV)
Technical Analysis - Part VI - The Average Directional Index (ADX)
Technical Analysis - Part VII - The Aroon Indicator
Technical Analysis - Part VIII - The Accumulation/Distribution Indicator (A/D)
Technical Analysis - Part IX - The Supertrend Indicator
Technical Analysis Part X - Parabolic SAR Indicator
Technical Analysis Part XI - Support & Resistance Levels
Technical Analysis Part XII - Fibonacci Retracement Levels
Technical Analysis Part XIII - The Awesome Oscillator
Technical Analysis Part XIV - The Arnaud Legoux Moving Average
Technical Analysis Part XV - Ichimoku Cloud
Technical Analysis - Part XVI - Footprint Charts
Technical Analysis - Part XVII - Heikin Ashi Candlesticks
Technical Analysis - Part XVIII - True Strength Indicator
Technical Analysis - Part XIX - The Klinger Oscillator
Also feel free to check out:
I hope this post was beneficial and of some use, and I plan on continuing the series with the next instalment focusing on Coppock Curves. Of course each technical analysis provides different beneficial information, so combining your most trusted and favourite ones can be the best strategy for finding entry and exit points when trading.
Have a great day.
Peace. CryptoGod-1.
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