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The RSI is a momentum oscillator that measures an asset’s recent price fluctuations in the range of 0 to 100. It is based on the average of gains and losses. The closest the RSI is to the tip, the greater the extent of the asset’s rotation.
For nerds like us here, let’s have a look at how RSI is calculated
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
The formula returns a value between 0-100 depicted at a graph on the chart.
In the uptrend market RSI chart pattern is usually in the range of 40-90, downtrend market can be characterized by 10-60 range.
What is RSI used for?
The RSI indicator indicates whether an asset is overbought or oversold. Traditionally, a commodity is deemed overbought if its value is greater than 70 and oversold if its value is less than 30. These levels can be changed to suit the asset if desired. For example, the volatility of cryptocurrencies varies by coin, and as a result, certain coins may become overbought more often than others. Adjustment to a higher level can occur in this situation. RSI can also linger closer to the edges for a longer period of time during heavy down and uptrends.
RSI will help you find chart trends such as double tops and trend lines that may not be apparent on the asset’s chart. Traders can identify signals by observing divergences in the RSI chart pattern and the market trend line.
When the RSI goes in the opposite direction of the price, this is referred to as a divergence. A bullish differential occurs, for example, when the RSI makes a higher low when the market makes a lower low.
Stochastic RSI is calculated by applying the formula of a stochastic oscillator to RSI values rather than raw price values.
The stochastic oscillator is more sensitive than the standard RSI and switches faster between overbought and oversold conditions. It is dependent on the asset’s past market success rather than on price fluctuations in general.