How to properly use RSI for a high reward v/s low risk strategy
This tutorial on RSI is the first part of a RSI Masterclass series.
RSI or Relative Strength Index is classified as a momentum oscillator, measuring the velocity and magnitude of directional price movements.
RSI or Relative Strength Index is classified as a momentum oscillator, measuring the velocity and magnitude of directional price movements.
- Momentum is the rate of the rise or fall in price.
- The RSI computes momentum as the ratio of higher closes to lower closes: cryptos which have had stronger positive changes have a higher RSI than cryptos which have had stronger negative changes.
Risk Management
- The thresholds are generally set to a safe 70-30.
- Risk tolerant: 33-60
- Risk averse: 20-80.
Overbought-Oversold Levels:
- If the RSI is less than 20, it means that the market is oversold, and that the price might eventually increase.
- Once the reversal is confirmed, a buy trade can be placed.
- Conversely, if the RSI is more than 80, it means that it’s overbought, and that the price might soon decline.
- After a confirmation of the reversal, a sell trade can be placed.
RSI will only cross 80-20 when there’s a strong momentum jump and thus can give us better and safer quality trades than 70-30. Where as in case of 66-33, RSI might oscillate quite frequently in that range so it’s safer to use this pair along with some trend indicator to prevent losses.
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