Understanding the Relative Strength Index (RSI) Indicator and How to Apply It to Crypto Trading

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As a crypto trader, understanding how to apply RSI to your trade is very important, as it is a momentum indicator that is used to indicate the level of overbought or oversold state of a cryptocurrency or any other digital asset that is traded. However, RSI is best known as an oscillator indicator that is used by traders to calculate the opposite values of two bands, which are high bands and low bands.

Based on the volatility of the crypto markets, knowing how to apply technical indicators like RSI will help you know when to enter the market or not. I.e., knowing your entry point and exit point. RSI was introduced by a market analyst named J. Welles Wilder Jr. in 1978 to evaluate the change in price of assets. By using the RSI indicator, you will not only know your entry and exit points, but you will also get to know when the market is overbought or oversold. Having said that, let's take a look at how RSI can be calculated before applying it to your chart.

Formula:

100 [100/(1 + RS)] = RSI

Average Gain/Average Loss = RSI

Sum of gain per period or time frame (e.g., 14) = average gain

Sum of loss per period or time frame = average loss

The good thing about the RSI indicator is that you can see it on several trading platforms that offer you all the values and tools to carry out your trade automatically. In this case, calculating the RSI indicator should not be a problem for you because it's an automatic indicator. All you have to do is apply it to your trade, and you will then see the line graph of the RSI. In this tutorial, we will be applying RSI on TradingView.

On Tradingview, click on the indicator and search for RSI. The easiest way to use RSI is to buy when a cryptocurrency is oversold and sell when it's overbought. To this end, when the RSI line is at 70% and above, it means the market is experiencing overbought conditions, and when it's at 30% below, it means the market is experiencing oversold conditions.

As a crypto trader who is making use of RSI, whenever you see that the RSI line is above 70%, you should know that the asset is currently overbought, and when it's below 30%, the asset is currently overbought. This means that buyers are in control of the market, which makes the buying pressure higher than the selling pressure. Whereas, oversold means sellers are in control of the market, which makes the selling pressure higher than the buying pressure.

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