RSI image

How to use RSI in Trading

By Kidsarow | Kidsarow | 25 Feb 2020


There is an indicator often used in the world of forex trading or even crypto trading. The "RSI". In this article we will see what it means and how to use it to improve positions and finally have a better trade.

1. Definition.

The "Relative Strenght Index" or RSI is adjusted by the amount by witch the market increased or decreased. The "RSI" values range goes from 0 to 100, 50 being therefore the average.

2. Understand the values.

The RSI is an oscillator, when the RSI rises drastically we will speak of "High RSI" which indicates that the market is growing rapidly conversely if the RSI goes down quickly we will speak of "Low RSI" indicate a strong decline in the market.

We can split the RSI into four cases :

  • If the RSI is lower than 30, we will speak of "Oversold".

  • If the RSI is between 30 and 50, this indicates that the market is falling and can therefore have a bear market.

  • If the RSI is between 50 and 70, this indicates that the market is growing and can therefore have a bull market.

  • If the RSI is lower than 70, we will speak of "Overbought".

chart rsi explain

3. Oversold and Overbought.

A common error that is found among novice traders even a little more advanced, is to sell when the indicator indicates "Overbought" and to buy when one is in "Oversold". However, this is not entirely true. To understand and use these two cases it is necessary to refer to a graph and more precisely to the line of resistance and support.

Indeed, when approaching a resistance line the bull tendency will be to buy in order to break this resistance line in order to raise the price. This desire to want to break this resistance is often translated by an RSI greater than 70 or a signal of "Overbought".

support + rsi = Oversold

We can find this same case on the contrary during an approach this time of a support line. When the price is close to the support line, the "bears" tries to lower the price by overselling to break the support line. The RSI is then found below 30 indicating a "Oversold" signal like in the yellow rectangle.

Combining the resistance and support lines with the RSI allows you to take a good position indeed if one is in the case of the resistance right with an "Overbought" signal then this can be a good position to sell, reverse if we are in the opposite case where we are on the support right with an "Oversold" signal, this can be a good entry for a purchase.

Warning ! Always wait for confirmation of price action !

4. Timestamps, length and Range.

As stated precisely, the RSI is an oscillator so the signals can be polluted. To properly use the RSI, the time units below H1 are strictly avoided because too high volatility which will make the RSI totally unhealthy or useless. Prefer higher time units like H1, H4, D1 or W1 to have optimal signals.

By default the length chosen by most traders is a length of "14". However you can choose a length of "7" to take faster trades like daytrading or a length of "21" to be even more precise for the long term and a more secure position.

Please note that when we enter a range trend, the RSI indicator becomes useless because it cannot indicate a direction.

5. Divergence.

The RSI divergence is a very good indicator to potify yourself and indicate a change of trend to come. It is expressed by a divergence between the RSI line and the trendline.

divergeance rsi

In this charts of VET/USDT peer we can see in the trendline we have lower lows and higher lows while in the RSI chart, we have higher lows and higher highs. So we have an RSI divergence, which may indicate a change in future trend from bearish to bullish. For a more secure position you can take an entry when the RSI exceeds the value of 50.

6. Conclusion.

The RSI indicator is a very good indicator for technical analysis, it allows you to better prepare for an entry or even an exit and it gives us new information to better understand what is happening on the market. However, the indicator alone is not suitable for taking a position, coupled with other indicators like MACD but especially the support and resistance lines and you have a good powerful combo.

But it should not be forgotten like any other indicator that it is theory, and sometimes it will not be enough to take a position. However it remains one of the most used indicators, using it myself it often allowed me to take a good entry position or exit positions. Now it's up to you to take a better position.

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Kidsarow
Kidsarow

A simple human believer in the future of crypto and decentralization. Sharing my knowledge freely at the service of everyone.


Kidsarow
Kidsarow

Here you will find content about cryptocurrency, Blockchain technologies, trading but also psychology and many others. In the search for knowledge, it will be shared freely and free. See you in my next post.

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