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Today we will learn how to use the Relative Strength Index (RSI)
First things first: what is it?
We are talking about one of your best friends when trading.
It is a technical indicator that is used to measure the strength of trends within any market. It is extremely popular because it is relatively easy to interpret and, in the right hands, can be very effective for effectively deciding your investments.
How to calculate it
The RSI is calculated by dividing the number of periods of price increases by the number of periods of price decreases, and multiplying the result by 100.
The RSI value oscillates between 0 and 100, and is interpreted as follows:
Values below 30: indicate that the market is oversold,
Values above 70: indicate that the market is overbought,
Values between 30 and 70: indicate that the market is
How can I interpret the values
As you may have already deduced, the simplest way to take advantage of this indicator is to use the 30 and 70 levels as entry and exit signals.
For example, if the RSI is below 30, we can open a long position, expecting the price to rise. If the RSI is above 70, we can open a short position, expecting the price to fall.
TIP: Another way to use the RSI is to look for divergences.
When we talk about a divergence, it means that the price of an asset is moving in a certain direction, but the RSI is moving in the opposite direction. Historically, it has been quite important to take them into account, especially when talking about Bitcoin, for example.
They can be signals that a trend is about to change.
Errors to avoid
Making trading decisions based solely on the RSI:
As we often say: the market is alive and everything is interconnected.
The RSI is a useful tool, but on its own it only shows us 20% of the information. It is key to combine the RSI with other indicators and factors, such as fundamental analysis, to get a more complete picture of the landscape.
Not taking into account the RSI period: The RSI period influences its sensitivity to changes in the market. By default, the RSI period is 14 days. You should choose a period that is appropriate for your trading style and the type of asset you are analyzing.
Ignore the market trend: It is very effective for identifying trends, but it is not infallible. Remember that it is not just about the numbers, everything is an ecosystem. Stay tuned to news, decisions of large companies, and the history of the asset you are working with. It is also extremely important to remember that markets have a strongly statistical basis, which refers to the different probabilities that an event can occur as mentioned above.
Tips to master RSI better and faster
Try different periods: As we told you above, the default RSI period is 14 days. However, you should experiment with different periods to see which one works best for you. For example, a shorter period tends to be more sensitive to changes in the market, while a longer period could provide a more general overview of the trend.
Manage other indicators: The RSI is a very useful indicator, but it is not the only one that traders can use to make decisions. Combine the RSI with other indicators, such as MACD or ADX.
Optimize your processes with the power of AI: This allows you to handle a large amount of data and movements while focusing fully on interpretation and your next decisions supported by professional tools. This is how we work and we tell you more here
As always, the best way to learn how to use the RSI is by practicing.
If you are still starting out, a demo account works perfectly to test different strategies and settings before entering the market with your own capital.
So get to work, trader! Let's go for those results!
We will be happy to accompany you from our Telegram community where traders from all over the world meet.
See you next time!
REFERENCES
For this article, prompts have been used to request information
interpreted and provided by AI (Google Bard). Written and edited
by Kevin David Terán and verified by Pedro Arizaleta and Erwin Sánchez