Chart Reading: Understanding the RSI

The cryptocurrency industry likes to make everything confusing. Everybody claims that they have a “secret formula” to success. 99% of the time people are using common indicators to pick coins to buy/sell. I have a list of indicators that I use to make predictions and I am going to go through them 1 by 1 so that you can actually learn how to make predictions on your own.

Please Note: I use https://www.cryptocompare.com/ to do all of my technical analysis. Simply go to a coin and then click on “charts” (as seen from the image below)

Once you click charts, you can find some of the most used indicators by clicking on the drop down “Bottom Chart”.

If you want to follow along with this article, click here to see the coin with the indicator underneath it.

The Relative Strength Index is a commonly used indicator that can be helpful to understand if a coin is overbought or oversold. Let me explain the actual calculation before we actually get into the details (it might seem confusing but bare with me):

RSI = 100 – 100 / (1 + (Average gain of up periods over time frame / Average loss of down periods over time frame))
The RSI is going to spit out a number that is between 0 and 100. If the number is below 30, the coin is most likely being oversold. If the number is above 70, the coin is most likely being overbought. In this article, I will refer to areas above 70 and under 30 as “target areas”.

The RSI can be calculated in any time frame but the most popular time frames are 21 days and 14 days (If you see RSI 14 or RSI 21, the number is referring to the timeframe).  The bigger the time frame, the more data is used in the calculation and that makes it less reactive. In other words, the RSI 21 is going to have less target areas than the RSI 14. A smaller time frame is going to be beneficial if you are day trading, while a larger time frame will be beneficial if you plan on buying and holding a coin.

This indicator is able to predict these price movements because it helps predict trend reversals. For example, if a coin is being overbought, the price is most likely at a peak. The RSI is going to help point this out so that you can understand a reversal is about to happen. Obviously it is not going to be perfect, but it can be extremely help to help make decisions about buying/selling coins.



Take a look at the image above.  As you can see, this is the chart of ETH over the past 2 weeks with the RSI 21 calculation underneath it. A lot of crazy price movements have happened over this time frame. The price dropped all the way to $130 and then all the way back up to $240. As you can see from the GREEN and RED arrows that I have drawn, the RSI points helped “predict” the price movements. When a lot of green arrows showed up, the price began to rise. When a lot of red arrows showed up, the price began to drop. Look at how overbought ETH is at the moment, it looks like it is predicting a correction down at this point.

That is it guys. It is not as difficult as everybody makes it seem. Try it yourself. Add this to your analysis before you buy a coin because I guarantee it will help you make a more informed decision. Don’t take this as fact because it will not be perfect. Use it as an additional tool to help aid your decisions.