The Relative Strength Index is one of the technical analysis tools available online for investors to verify and ensure the accuracy and safety of their investment decisions. RSI works in the form of an oscillator, enabling investors to track the speed and change in the movement of prices of various cryptocurrency tokens.
Understanding the Relative Strength Index (RSI) indicator is an easy way to get a green signal for purchases and a red signal warning to stay away from the token for the time being. A framework of overbought and oversold coins can also be gained with the use of RSI Indicators in the right manner. Apart from all these, divergences in the price trends and centerline crossovers are a couple of other cryptocurrency behaviours speculated by RSI Indicators.
How RSI Indicators Calculate Overbought and Oversold Conditions: The Formulas Exposed
RSI is calculated for an average time period, which is a period of two weeks or 14 days. An average is calculated by taking all the gain values during the bullish days and all the decline values during the bearish days. RSI values are set within a range between 0 and 100, in which 50, obviously, is considered the mid-point. With all the raw data, a mathematical formula will be executed to gain the real RSI value. The formula has been given for your reference.
RS = 100 – (100 / 1 + RS)
How to Interpret the RSI Values: Explained
As already mentioned, the RSI values can be seen between the values of 0 and 100. 0 suggests extreme bearish momentum for a particular cryptocurrency token, whereas 100 suggests the direct opposite, that is, an extreme bearish momentum. Everything below the value of 50 belongs to the bearish trend, and everything above falls into the bullish category.
Bullish momentum suggests that the token is currently overbought, indicating a lucrative period to buy. But the bearish trends suggest that the majority of investors are trying to sell the asset real quick, probably because the lucrative margins did not hit the desired levels with respect to the investments they made in the first place.
However, it is also important to note that all these trends visible through the RSI Indicators are subject to change with the fluctuating market behaviours and investment sentiments. However, RSI makes it more all-encompassing by including the hints and clues about the possible reversals through price divergences in the scale. Moving Averages and Bollinger Bands also work hand in hand with the RSI indicators to give a better understanding and speculation for the investors.
Interpreting the Overbought and Oversold Conditions
Within the scale between 0 and 100, where 50 stands as the midpoint, all the values towards the left are bearish and all the values to the right are bullish. However, if the values are between 30 and 70, the current trend is more susceptible to market volatility and potent enough for a positive reversal towards the bullish trend. But if the value has crossed beyond the point of 70, the current trend can be interpreted as extremely bullish, and it is unlikely to return to an unexpected bearish direction. Similarly, if the value is below the point of 30, the trend has gone irreversibly bearish, and it would be less sensible to expect an eventful comeback to the bullish side of the scale.
Interpreting the Market Trends
Understanding trends using the RSI values would be the best thing to learn, especially in understanding the optimal entry and exit points for a particular cryptocurrency token. One erroneous assumption of many amateur investors is that the prices will return to an extreme bullish momentum after an absolute dip in prices. But usually the market can be interpreted to be in an upward trend, only when the values are seen fluctuating between the values of 40 and 70, for a predefined period of time. If the investor is waiting for the value to take a dip beyond 30, a comeback can usually be unusual. The best entry point, as per many of the research and studies, is between the values of 40 and 70 in the RSI scale.
Similarly, if the scale is fluctuating between the values of 50 and 60 for a particular period of time, it can be interpreted that the values are unlikely to go higher. Hence, waiting for an extreme price hike to sell your assets in order to gain the best returns would be a bad idea in this context.
Interpreting Divergence and Trend Reversals
There are two different types of divergence, namely, Bullish and Bearish Divergence. As the name suggests, Bullish Divergence can be interpreted as a positive trend, whereas Bearish Divergence is interpreted as a negative trend. During Bullish Divergence, the price range of the token will be in a lower low, but the RSI scale will be on a higher low, suggesting that the prices may soar high within a period of time, weakening pressure on the investors to sell the assets. When it is a Bearish Divergence, even if the market prices of a coin are quite high, the RSI indicators will be suggesting a lower high, signalling that the prices are unlikely to go higher and likely to undergo a decline in value.
A Final Thought on RSI Indicators
RSI Indicators are something that makes a significant difference between a skilled trader or investor and an amateur. With the help of these indicators, one can easily predict the market trends and thereby mitigate potential risks involved. This is also a quite effective way to decide on the ideal entry and exit points to invest in a cryptocurrency, so that the investor will not make a less lucrative step with premature selling. Mostly, investors tend to invest in a digital asset just by looking at the current price and bullish and bearish trends. But the bullish and bearish divergence trends in the RSI Indicator and the probability for trend reversals will help them make the right move, calculating the chances for a reversal to the opposite direction.
