Relative Strength Index (RSI)
Relative Strength Index (RSI): One of the momentum price chart indicators that serves to predict the future Bitcoin price movements and determine the bullish and bearish trends.
The indicator was developed by a technical analyst Welles Wilder to determine if the asset is overbought or oversold. RSI is one of the most widely used technical trading tools. And this is why.
The Tradingview defines RSI as a momentum-based oscillator which is used to measure the speed as well as the change of directional price movements. It indicates the current overbought or oversold condition of a financial instrument on a scale from 0 to 100.
RSI = 100 – 100 / (1 + RS)
RS = Average of X periods closes up / Average of X periods closes down
X = Recommended to use 14, but can be a number of the trader’s choosing
An asset is considered undervalued or oversold when the RSI drops below 30. On the other hand, the RSI above 70 shows overbought conditions.
To put it simply, as the market tends to stay in bullish/bearish balance, once the index drops below 30 – the price is more likely to go up, while the above 70 RSI indicates the possible drop. The examples of both RSI and BTC/USD price correlations on BTCMEX are shown below.
Detecting the bullish and bearish market trends using RSI is reliable and easy.
According to Wilder, the bullish RSI Divergence happens when price makes a new low but RSI makes a higher low. On the other hand, the bearish RSI Divergence is indicated by the price making a new high but RSI making a lower high.
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