Crypto Academy Week 12 - Homework Post for [@kouba01] // RELATIVE STRENGTH INDEX
Hello crypto Prof @kouba01 !
Thank you so much for giving us another wonderful Lesson this week , below is my homework task for this week on Relative Strength Index .
This is a technical indicator that displays a particular momentum at time giving information about how much of a coin is overbought or oversold, this indictor usually have a number ranging from 0-100 and the movement of the curve appears like an oscillator.
The numbers on the RSI graph tells a trader if a coin is overbought/overvalued or oversold /undervalued , when the oscillator rises to 70 and above it a sign of a reversal parttern because the coin is overbought or overvalue and when it is below 30 it is oversold or underestimated hence the probability of it changing trend is high.
Mathematically RSI can be calculated using two formula but before that let define some terms we need to understand before any calculation.
- Average Gain or Loss : this refer to the average percentage you get or loose when you entered a trade of a particular coin
This can be calculated by adding the total number of gains within a number days divided by the number days, let say I a week you made a sum of $10 meaning after compiling the profits you made in each within the week you made $10 , dividing this by 7 will give us the average gain same way we calculate for average loss
- To calculate the RSI we usually consider a standard period of 14 days , the formula below is used in this calculation
- From the formula above let doo this calculation , let say Invested in Steem for 14 days and made 100% and I want to determine either to keep HODLing or sell my investment with the help of RSI
- Before one will begin to doubt a trend it means the individual is sensing some little drops or loss , let say in this case I have recorded 5% I will have to divide this loss by the number of days it got recorded let say 3 days
- Using the formula RSI = (100)/ 1 +(100/5)
- RSI = 4.76, this indicates that the price was underrated and oversold hence the trend might change within few days.
RSI is a good indicator for already experienced traders but beginners will underrated this because you can solemnly put all hopes on this, you need to blend it with other indicators for a perfect decision.
Sometimes RSI delay in one trends while what is happening in the market is opposing it, so I advise we blend this with other indicators and knowledge when trading, you can trust only this for a successful trade.
With this question I will be using Binance trading chart for a short tutorial , the period use in the RSI is 14 , which indicate the number of days used to calculate the average gain and loss , depending on the type of trader you are , you can change this .
- Select a pair you want to trade
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- On the chart go to traders view and maximize the page
- Click on indicators and select RSI
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- After it appears you can configure it by changing the colors , or go to input to change the length of it which is 14 by default
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- One can also change the scale to his preferable one
RSI indicator shows two different sign either which are:
- A trend moving up is locked up and cannot go any further because it has been overbought and overvalued for a period of time meaning traders invested in it 14 days ago and they might be taking out profit at this point where the price has increased hence the trend must reversed and this is usually represented with 70 and above
- On the other hand as well traders are entering the market when the coin is oversold or underrated , hence many people will begin to invest in it since it has a low price and this will push the price up hence reverse a down trend. This is also represented by 30 an below
To prevent more losses the idea of filtering the RSI signal help in a perfect work, the default period used is 14 but adjusting this to 200 will help to prevent wrong prediction, In a way that the RSI will now consider the last 200 candle stick recorded using the chart for the calculation of your average loss and average gain, this will help enough to trust the RSI.
Your oscillating indicator moves above the 50 number anytime the average gain exceed the average loss within the 200 period.
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From the image above the RSI is more than 50 indicating that there was more gain within the last 200 period than losses.
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Looking at the chart above , on can see that within the last 14 days the price of DOT increased vehemently from 28-39 which tells us the large number of traders invested in this , looking through the RSI graph below the oscillator indicator is at 55 which means that DOT is kind of been over bought but the gains traders made is more than the loss the made hence the price might increase a bit till the oscillator shows 70 telling us that the coin has been over bought hence a new trend might begin .
The RSI is working according to my expectation because I set up a resistance for this coin using a blue line and I believe the price will bounce back to support when it hit it , hence RSI is telling me my prediction is right
In conclusion I will admit that RSI is a good tool for trading but beginners need to learn others as well , blending RSI and other technique will make you a good trader
Hello @alhajibabajnr,
Thank you for participating in the 4th Week Crypto Course in its second season and for your efforts to complete the suggested tasks, you deserve a 4/10 rating, according to the following scale:
My review :
The content of the article does not cover many aspects, so your role is limited to summarizing and reformulating the information. Several signals must be placed on the RSI on the latest chart to understand the importance of using it and to be able to analyze price changes.
Thanks again for your effort, and we look forward to reading your next work.
Sincerely,@kouba01