Steemit Crypto Academy Season 2 Week 4 Homework Task By @abdulhalim100: Cryptocurrency Trading With RSI.

Greetings to everyone once again. It is another week of the steemit crypto academy and i am here to post my homework task on the lecture of "cryptocurrency trading with RSI" taught by our honorable professor @kouba01.

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Question 1.

What is the Relative Strength Index - RSI and How is it Calculated?

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Let’s begin with knowing what a relative index is. A relative index is a trading tool used as an oscillating indicator like the Moving Average Convergence Divergence (MACD). It was developed by Willis Wilder as a technical momentum indicator.
The relative strength index is use for measuring an asset’s market and thereby enlightening traders in investments.

The relative strength index has a default mean of 50 and ranges between 0 and 100. With the relative strength index going above 50 it is said to be at a bullish state and if it is below 50 it is said to be at a bearish state. Having the overbought and oversold signals to be 30 and 70, when an asset is overbought it means that its relative strength index is above 70 and the vice versa.

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Calculating A Relative Strength Index

Below is the formula they use in calculating the relative strength index of an asset;

source

Considering the above formula, we have some particular term which we need to get the understanding before using that formula. We have what we call the “Average” which is used for calculating the summation of individuals entries divided by the total number of entries.

Considering this example to break the understanding to a layman. Assuming the profits earned by Kofi in a business he is doing within three days are 100$, 200$ and 400$. So if you want to know the his average profit for those three days, we take the sum of the profits within the three days and divide it by the number of days, which is mathematically represented as;

100+200+400/3 which gives 233.3.

Let’s look at the cryptomarket now. Assuming Litecoin keep rising for good 4 days within a week and has an average profit of 1.5% and start declining for the remaining days resulting in an average loss of 1%. Substituting this data into the above formula for relative strength index.

RSI= 100 - [100/1+1.5/1]

RSI= 100 - 40

RSI= 60

We have the Average gain to be 1.5% and Average loss to be 1%.

With the above example, we can see that the relative strength index for Litecoin was 60 which is above the median. With this the relative strength index graph will attain a bullish state. If the relative strength index was to be lower than 50 then we would have said the graph is attaining a bearish state.

Question 2.

Can We Trust The RSI On Cryptocurrency Trading And Why?

We can’t give our all to the relative strength index since everything has its own merits and demerits. More to the point relative strength index is not always perfect making it less reliable due its insufficient factor invents that influence the stock price and other important aspects.

Relative strength index sometimes continues to stay overbought or oversold and will be hard to predict the direction of certain stock. But to make it simple it must be supported by some other confidence factors such as resistance, support and many more.

Question 3.

How Do You Configure The RSI Indicator On The Chart And What Does The Length Parameter Mean? Why Is It Equal To 14 By Default? Can We change it? (Screen capture required)

Below are the screenshots on how to configure the relative strength index indicator on a chart;

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The relative strength index parameter is the decider of how stable relative strength index is and the speed of reaction to the market.

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The default Length is equal to 14 because of its lower specified duration outcome in trading signals with some unreliable signals. Also, the lower the number of tradings the higher specified duration counts.

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Off course we can make changes to the default 14 period by whether increasing or reducing it.

Question 4.

How do you interpret the overbought and oversold signals when trading cryptocurrencies? (Screen capture required)

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The above graph shows how to interpret the overbought and oversold signals when trading in cryptocurrencies. The overbought signal is indicated with a red color which is the relative strength index value above 70.

The oversold is also indicated with a green color indicating the relative strength index value below 30.

Question 5

How Do We Filter RSI Signals To Distinguish And Recognize True Signals From False Signals. (Screen capture required)

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Since no filter is accurate, there may be a relative strength index false signal which may lead to significant price change of an asset in either sides. So in order to filter the relative strength index signal one need to set his periods to 200 instead of the default 14. With this the relative strength index indicator will check for the last used 200 candles and measure the average profit and average loss which we did earlier. Now incase the average profit is more than the average loss over the past 200 then the indicator will be above 50. This same thing happens to the vice versa again.

Queston 6

Review the chart of any pair (eg TRX / USD) and present the various signals from the RSI. (Screen capture required)

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LTC/USDT

The above screenshot represent the chart of LTC/USDT on the signals of relative strength index. The arrow at the down pointing upwards shows that the on the 11 May, LTC showed a signal to buy due to it going down the 30 mark, making it an oversold asset. And the arrow at the top pointing down indicates that there was an overbought of LTC which gives it the signal to sell due to it going above the 50 mark.

Conclusion

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In conclusion, the relative strength index is an indicator which enables investors to detect overbought and oversold signals making it easy for investors to invest. The relative strength index will be a good and reliable tool if it is combine with other trusted indicators.

Thank you!!