How to create a profitable trading strategy with the relative force index (RSI)
The world of cryptocurrency trading has experienced significant growth in recent years, and with it the need for effective negotiation strategies. A popular tool that can help traders make informed decisions is the relative force index (RSI), a technical indicator developed by J. Welles Wilder Jr.
In this article, we will immerse ourselves on how to create a profitable trading strategy using RSI, covering its bases, its advantages and best implementation practices.
What is the relative force index (RSI)?
The RSI is a momentum indicator which measures the extent of recent price changes to determine excessive or occurrence conditions. It is calculated as the ratio of share differences in equity over a given period divided by the average variation of prices over this same period. The resulting value varies from 0 to 100, with higher values indicating more extreme price movements.
How does RSI work?
Here is an example of the functioning of the RSI indicator:
- If the share price has increased considerably (greater than 50), the RSI will be less than 30, which indicates that the current price is occurring.
- Conversely, if the course of action has decreased sharply (less than 30), the RSI will be greater than 70, which indicates that the current price is exaggerated.
RSI trading strategy
The creation of a profitable trading strategy with RSI implies using this indicator to identify the potential purchase and sale opportunities. Here is a step by step guide:
- Identify the market : Choose a cryptocurrency or an asset that you want to exchange, such as Bitcoin (BTC), Ethereum (ETH) or Litecoin (LTC).
- Configure your graph : Use a technical analysis platform, such as tradingView, to create a graph with several deadlines.
- Draw the RSI indicator: Configure a table of candlesticks with two indicators: the RSI and another indicator of your choice (for example, the MacD or Bollinger bands). The RSI must also be drawn on the same graphic.
- Determine the levels of surachat and occurrence : Use historical data to define the surachat and occurrence levels for the RSI, such as 70-80 for the occurrence and 30-40 for overabundance.
- Enter a purchase signal
: When the RSI crosses a level of occurrence (less than 20), enter a long position in the active with a stop-loss below your chosen level.
- Take out a job : When the RSI crosses the exaggerated level, leave the long position and enter a discovery order at the same price.
RSI trading strategies
Here are some popular trading strategies that integrate the RSI indicator:
- Bollinger Band Stradle : Use Bollinger strips to generate purchase and sale signals according to RSI values greater than 80 or less than 20.
- Long trend with low RSI : Identify a long trend in a cryptocurrency, then use RSI to determine if it is excessive (above 80) before entering a trade.
- Short trend with high RSI : Use RSI to identify short trends in a cryptocurrency, then enter a open sale order when the RSI is less than 20.
Advantages of the use of RSI
- Simplified negotiation decisions : RSI provides clear signals for purchase and sale, reducing the complexity of commercial decisions.
- Improvement of risk management : The RSI helps to identify over-racket and occurrence conditions, allowing traders to effectively define stop-loss commands.
- Increased precision : Using several indicators in conjunction with RSI, traders can increase their chances of successful transactions.
Conclusion
The creation of a profitable trading strategy with RSI requires understanding the operation of this indicator, as well as integrating it into your global trading plan. By following the steps described above and by combining it with other technical analysis tools, you can develop a reliable negotiation strategy that helps you make informed decisions in the world of trading of cryptocurrencies.
