How To Understand RSI Indicator to Become a Better Trader?
The RSI indicator is a popular trading tool that allows traders to determine the strength of an asset based on its current price and Relative Strength Index (RSI). It’s one-way investors can gain insight into market sentiment, which often changes with time or news events like earnings reports.
It’s like riding a bike, but with trading. Almost everyone gets it wrong at first and they have to keep getting back on if they want their losses erased or winnings realized in time!
In this article, you’ll learn how to understand the RSI indicator and use it properly.
RSI or Relative Strength Index was developed by J Welles Wilder. It moves between the value of 0 to 100 which shows the movement of the price. The faster the price moves, the higher the value of RSI gets.
In other words, the RSI indicator goes up when there have been large gains (or losses) in average.
But now the question comes, how average gain pushes RSI value up?
When the price moves up quickly and without any pullbacks, the average gain is bigger due to positive gains from trading. This leads to RSI values higher than expected as well!
Similarly, when the price of an asset dumps quickly with little to no pullbacks, your average loss becomes large because you are making negative gains. This leads to a lower RSI value which can result in more losses over time if left unchecked.
What Not To Do?
When the RSI is below 30, it means that traders think there’s no way for prices to go any lower. So what do they do? They hit buy buttons! Big mistake as this will lead you into investing in a downtrodden market which can prove disastrous with big losses taking over all your profits and even sending some people broke altogether (not gonna lie).
The reason being: remember, the above-average volume comes before good news? Well, meaning low levels of volatility usually indicate reduced trading activity.
Never sell the asset when RSI show overbought or buy when it’s oversold. Chances are strong momentum could mean the trend is going to continue, so selling may lead to potential loss.
One of the cleverest things a trader can do is, in the initial days, a trader can subscribe to a crypto trading signals provider. Signals providers study the market, analyze price movements with various tools. They also widely use RSI indicators to predict the reversal or possible market trends.
How To Properly Use RSI?
One indicator alone shouldn’t be taken as an analysis for trading. It should always be in confluence with other conditions like Support and Resistance level or supply and demand level, Fibonacci Retracements, and more.
However, there’s a simple strategy that you can try. Edit your RSI indicator for 200 periods. If the RSI is above 50, the coin is likely in an uptrend, and buying more can be profitable. If the value is below 50, the asset is in a downtrend.
To make an entry using RSI, all you have to do is look for the value. It is clear that when RSI is below 30, there’s a strong bearish momentum but when the value crosses 30 and starts going up, it signals there is a buying pressure. Combine this with other patterns and with confluence, you’re good to go.