How to create a profitable trading strategy with relative force index (RSI)
The world of cryptocurrency trading has registered a significant increase in recent years and, with this, effective trading strategies are needed. A popular instrument that can help traders make the knowledge of the case is the relative force index (RSI), a technical indicator developed by J. Welles Wilder.
In this article, we will approve of how to create a profitable trading strategy using RSI, which covers the basic elements, advantages and best practices for implementation.
What is the relative force index (RSI)?
RSI is an impulse indicator that measures the extent of recent prices changes to determine the over -stated or overcoming conditions. It is calculated that the ratio between the price differences of the shares for a certain period divided at the average price change in the same period. The resulting value varies from 0 to 100, with higher values that indicate more extreme price movements.
How does RSI work?
Here is an example of how the RSI indicator works:
- If the price of the shares has increased significantly (over 50), the RSI will be below 30, indicating that the current price is exceeded.
- On the other hand, if the price of the shares has dropped sharply (under 30), RSI will be over 70, indicating that the current price is exceeded.
RSI Trading Strategy
Creating a profitable trading strategy with RSI involves using this indicator to identify potential purchase and sale opportunities. Here is a step -by -step guide:
- Identify the market : Choose a cryptocurrency or an asset you want to trade, such as Bitcoin (BTC), Ethereum (ETH) or Litecoin (LTC).
- Configure the graph : Use a technical analysis platform, such as tradingView, to create a multi -time graph.
- Plots RSI indicator : Configure a candlestick with two indicators: RSI and another indicator of your choice (eg, MACD or Bolninger bands). RSI should be represented on the same graph.
- Determine the over-stated and outdated levels : Use historical data to set up purchase and overcoming levels for the RSI, such as 70-80 for Overld and 30-40 for overlapping.
- Enter a purchase signal : When RSI passes over an overcoming level (below 20), enter a long position in asset, with a stop loss below the chosen level.
- Exit in a trade : When RSI passes back above the purchase level, get out of the long position and enter a short sale order at the same price.
RSI Trading Strategies
Here are some popular trading strategies incorporating the RSI indicator:
- Bolninger band Straddle : Use Bolninger bands to generate purchase and sale signals based on RSI values over 80 or below 20.
- LOW LOW TREIENCY TREATE
: Identify a long tendency in a cryptocurrency, then use RSI to determine if it is overestimated (over 80) before entering a trade.
- Short trend with high RSI : Use RSI to identify short trends in a cryptocurrency, then enter a short selling order when RSI is below 20.
Advantages of using RSI
- Simplified trading decisions : RSI offers clear signals for purchase and sale, reducing the complexity of trading decisions.
- Improved risk management : RSI helps to identify overestimated and overcoming conditions, allowing traders to effectively establish stop-bloss orders.
- Increased precision
: Using several indicators in combination with RSI, traders can increase their chances of successful transactions.
Conclusion
Creating a profitable trading strategy with RSI requires understanding how this indicator works, as well as incorporating it into your general trading plan. Following the steps presented above and combining it with other technical analysis tools, you can develop a reliable trading strategy that helps you make the knowledge of the cryptocurrency trading.