What is RSI? Formula and how to use RSI indicator results

When investing in cryptocurrencies or any other exchange, RSI is one of the most significant indicators that each trader should employ. However, not everyone knows the significance and use of this signal, which might lead to incorrect conclusions. So, in today’s column, we’ll explain the RSI in further depth, allowing traders to develop their own appropriate, effective, and readily lucrative trading methods.

1. What is the Relative Strength Index (RSI)?

The relative strength index (RSI) is another name for the RSI (Relative Strength Index). This is a technical indicator for coin financial market product analysis.
The rsi indicator is designed to calculate the price change over the most recent period. It then assists traders in identifying markets that are overbought or oversold.
The RSI is a graph that travels between two extremes and is shown as an oscillator with a range of 0 to 100.

2. Who is the inventor of the RSI?

J. Welles Wilder Jr. created the RSI, which was first published in the book “New Concepts in Technical Trading Systems” (New Concepts in Technical Trading Systems) in 1978.
After two years of publication, Forbes magazine named Wilder “one of the best traders” and suggested that “for those seeking for a basic technique, this book is the ideal pick.” (“This book is the place to start for those of you who have seen all of the standard systems.”)
Unfortunately, there is yet to be a Vietnamese translation of the book. However, if you truly appreciate this instrument and have expertise in coin trading, you may learn more by following the same conclusions as Wilder, the developer of RSI, to have a deeper understanding. based on oscillator analysis concepts

3. How to compute RSI and the RSI Formula

What does the RSI represent? The RSI compares the magnitude of the candles (i.e. the strength of the trend) in the RSI sense. The trend) over a given time (period) provided in the parameters (the longer the candles, the stronger the trend). The RSI indicator’s buy and sell indications are based on this in general.
The RSI formula is as follows:
Step 1: The Relative Strength Index determines the range of price movements that are positive (U) and negative (D). The formula for determining the relative strength index is given below.
If the current closing price is greater than the prior period’s closing price, the closing period is bullish (positive).
U = I – I – I – I – I (i-1)
when D = 0
Price I is the current period’s closing price (i.e. the current candle), and Price (i-1) is the preceding period’s closing price.
If the current closing price is lower than the prior closing price, the closing period is bearish (negative).
0 = U
Price (i-1) – Price D = Price (i-1) – Price D = Price (i-1) – (i)
U=0, D=0 if both closing prices are the same.
.Step 2: is to figure out how to determine relative strength.
SMA(N) of U / SMA(N) of D = RS
The values of U and D are smoothed using a Simple Moving Average (SMA) with period N in this calculation. RS (Relative Strength) is a ratio between average profit and average loss, according to one source.
Step 3: How to Calculate the Relative Strength Index (RSI)
RSI = (100 /(1 + RS)) – 100
This is one of the most widely used formulae, although it is far from the only one. Price movements are smoothed using an Exponential Moving Average in altered versions of the RSI calculation, for example. The author recommended using the Simple Modified Dynamic SMMA.
Note 1: If the formula includes SMA. The value of D in the denominator RS will be zero if the trend is up consistently without a bearish candle in the time recorded in the indicator parameters. The oscillator’s value is set to 100 since it cannot be split by zero.
Note 2: The above formula is a general guideline for calculating indexes, not a constant. As a result, for an uptrend with a period of 2, the indicator value should be 100.
The RSI is calculated using an Excel table.
For technical analysis, I created the Relative Strength Calculator template. This Excel file includes a method for computing the Relative Strength Index, as well as the ability to visualize it using the RSI values.

4. RSI (Relative Strength Index)

The RSI indicator provides three main indications, which are also aspects that assist us come up with analysis and trading suggestions.
So, what exactly are the RSI signals?
4.1. Overextended – What does it mean when the RSI is overbought?
When the RSI exceeds 70, the market is considered OVERBUY. This often occurs during an upswing and indicates that the market is about to revert to the negative.
When the RSI line hits the 70-100 zone, the indicator offers an OVER BUY indication. You may utilize the 80-100 zone or higher if you want a stronger signal in the OVER BUY zone. The RSI signal becomes stronger as a result, but the amount of OVER BUY indications decreases dramatically.
4.2. Oversold RSI – What Does It Mean?
When the RSI is less than 30, the market is in OVERSELL territory. This normally occurs during a slump and indicates that the market is about to turn around.
When the RSI line hits the 30-0 zone, the indicator produces a TOO SELL indication. You may utilize the 20-0 zone or lower if you want a stronger signal in the OVER SELL zone. The RSI signal becomes stronger as a result, but the amount of OVER BUY indications decreases dramatically.
4.3. RSI Divergence – What Does It Mean?
The RSI may move against the price motion (divergence) to suggest a market reversal, similar to other momentum indicators like the MACD or Stochastic.
Bullish RSI Divergence occurs when the market establishes a new lower bottom while the RSI rises, signaling a bullish turnaround.
Bearish RSI Divergence occurs when the market sets a new high while the RSI falls, signaling a bearish reversal.

5. What is the most typical error people make while utilizing the RSI indicator?

Many traders use indicators in a mechanical manner, i.e. “I will do whatever the indicator tells me.”
This is particularly dangerous since each trade indication has its unique significance, which you must comprehend in order to correctly apply it.
Here are two common blunders that many traders make:
The first mistake is to place a BUY order when the market is oversold.
Mistake #2: Placing a SELL order while the market is in an OVERBUY condition.
Do you recognize yourself?
Yes, as you may recall from the last Stochastic course, these are also typical blunders made by Stochastic traders.
Listed below are a few examples:
The first mistake is to place a BUY order when the market is oversold.
The RSI indicator reached the oversold region in the example above, but it stayed in the oversold area for an extended period of time. Meanwhile, the price continued to decline, making new lows that were lower than the previous ones.
If you solely utilize TOO SELL market signals to trade, you will often make this error, and your chances of making a profit will be slim.
Mistake #2: Placing a SELL order while the market is in an OVERBUY condition.
Despite the fact that the RSI did not remain in the OVER BUY zone as in the previous case, the market did not revert.
The RSI has left the overbought level, but the market did not reverse, just marginally correcting before reverting to the original trend.
As a result, relying just on the OVER BUY market signal for high-probability trading opportunities is insufficient.

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