Candlesticks and support levels can do a lot of good for traders, but you want to have has many indicators as possible that all tell the same thing. The Relative Strength Index – or RSI – is the one we are talking about in this guide.
RSI is meant to show when an asset is over- or undervalued. This way RSI can help you take advantage before the market will correct itself. It’s a good way to buy when RSI indicates an asset is undervalued, for obvious reasons.
RSI is calculated by a complex formula, but you don’t really need to know what this formula is all about. Most exchanges just offer the tool to generate the RSI visually for you. Yet, let me try to explain it.
RSI = 100 – 100 / (1 + RS)
RS is the average gain (AG) divided by the average loss (AL). By default the RS is calculated by looking at 14 periods of time. So the AG is the sum of gains over the past 14 periods, divided by 14. And you do that for every point on the timeline to generate a graph. The outcome for each of these calculations will be a number between 0 and 100.
The creator of this formula (Welles Wilder) stated that 30 and 70 are the values where we draw a line. When an asset reaches a RSI value above 70, it’s overbought. So it’s likely to go down again. When it drops below 30, it oversold and it’s bound to go up.
On the 24 of July BTC was clearly overbought. That could’ve been an indicator to sell your BTC. August 8th gave an indication to buy again as BTC was oversold. The steep sell off of Bitcoin came as a surprise to many on September 5th, but if you look at the RSI it has been pushing the upper boundaries of the 70 RSI mark for a few days already. Therefore a shift in direction could’ve been predicted using RSI.