Using the RSI Indicator to Trade Crypto Coins and Tokens
The Relative Strength Index, or RSI for short, is a powerful indicator used by traders to identify trade opportunities across the crypto markets. This indicator tracks price movements and smooths out the nuances in price action, making it easier to interpret. It is important to understand how the RSI works and how it calculates its results, or you could be getting false feedback. As such, backtesting is highly recommended.
RSI is useful in determining when a crypto coin or token is overbought or oversold. It can also help determine when it is a good time to buy or sell. This indicator is available in most trading platforms, so you should not have trouble finding one. And the best time to buy is when the RSI is low.
RSI is considered overbought if the price moves in the opposite direction of the RSI. When RSI diverges from the price, it means that the trend has changed. A bearish divergence means that the RSI is decreasing its momentum while a bullish divergence indicates that price is gaining momentum.
An RSI crypto shows strength in an asset over multiple timeframes. For example, a 1 hour chart shows strength over fourteen hours, while a four-hour chart shows strength over 56 hours. Then, a 1 day chart shows RSI over 14 days. This indicator is often in sync with the price chart. In fact, from time to time, it reacts before the price does.
Using RSI is a highly effective tool for identifying trends in the market. You can also use a RSI indicator to predict which crypto is going to move higher or lower in a specific period of time. Depending on your strategy, a single day will provide a small number of signals. However, a longer period may give you better investment opportunities.
Another important feature of RSI is its ability to highlight price formations that display divergence. For example, a double top with bearish divergence may indicate a sell order while a double bottom with bullish divergence can mean a buy order. You can also set a stop loss below the previous low, in case a new low is formed.
Another popular indicator in cryptocurrencies is the MACD indicator. This indicator compares two exponential moving averages and is considered one of the best indicators for highly volatile markets. While the MACD indicator can be used to determine trends, it is also prone to misleading behavior. Therefore, it is important to understand how to use both indicators in tandem.