The RSI indicator explained in everyday English.

By MadMaxx | Psycho Crypto | 10 Mar 2020


While it might seem like a joke at first, technical analysis is actually one of the simplest things on this planet to learn.

All you need to do is be consistent in your learning process and try your best to be patient. You'd be trading soon.

Today, I'll be looking at the RSI indicator.

RSI stands for Relative Strength Index. When used together with the Bollinger bands, as well as support and resistance, they can become the ultimate tool for guiding your entries and exits.

That is, if you use them right.

But how is right?

Let's find out.

The RSI is graduated from 0-100.

There is a mid line: the 50 level, while on some trading platforms there might also be a 30 and 70 level.

These levels all mean something as I'll explain soon.

The area between the 0 and 30 line represents an overbought market condition. This is supposed to be a good spot to buy at, as it signifies that the sellers are out of the market completely, and buyers can start pushing the price up.

The area between the 50 and 70 line represents an oversold market condition, which means that the sellers are just getting started, and that the price may likely drop like a rock.

The 50 line is kind of a neutral point. As long as prices remain above the 50 line, we say that they are approaching oversold levels, and the opposite is for below the 50 line.

The RSI can also bounce on the 50 line in either direction. So a bounce on the 50 line downwards represents that the buyers weren't enough to start a bullish move up. Of course, the reverse is the case for a move up.

But how are the numbers derived? Is the RSI doing some sorcery and counting the actual number of sellers and buyers?

Well no. The RSI simply measures the strength of each candle.

Usually, most traders use a 14 period RSI. This means that the RSI gives a ratio of the number of bearish to bullish candles of the last 14 candles, and then plots a line in between a specified range for that value.

"In English Max" you say.

Ok. The RSI checks the last 14 candles, and if there are more bearish than bullish candles, it plots a line in the appropriate range. The same goes for bullish biases.

That's how the RSI works.

So should you just buy when the RSI is below 50, and sell when it's above it?

Well, no. But you should use other TA tools in tandem with the RSI.

So I mentioned the Bollinger bands used together with the RSI. The Bollinger bands measure a standard deviation, which is the difference between the close and open of a candle, compared to the previous candle.

This gives an 85% accurate picture of where to buy and sell. It's simple: Buy at the bottom of the bands, and sell at the top of the bands.

So combining that with RSI, we can deduce that if the RSI is below 50, and the candle is on the lower Bollinger band, it is about 90% safe to buy. And the reverse is the case for selling combinations.

Thanks for reading!

 

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MadMaxx
MadMaxx

In the eternal quest for crypto fulfilment. I'm an obese frog on the internet, what I say most definitely isn't financial advice.


Psycho Crypto
Psycho Crypto

Fun experiments with crypto!

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