The Relative Strength Index or RSI is one of the most common indicators in Technical Analysis, or TA for short. In traditional stocks and cryptocurrencies like Bitcoin and Ethereum, TA utilizes existing data to make more informed decisions on when to buy and sell for traders. From traditional to cryptocurrency markets, most traders rely on specialized tools to perform these analyses, and the RSI is one of them.
More specifically, RSI is an oscillator, a separate category of TA indicators from Moving Averages. RSI calculates a band between 2 extreme values (0 to 100) to measure the magnitude of price movements as well as the speed of these movements. Therefore, RSI thrives in choppy or oscillating trading markets or markets without strong trends, in contrast to moving averages.
Conversely, the indicator can stay in overbought or oversold territory for long periods of time and generate more false signals in strong trending markets - where moving averages excel.
How does the RSI indicator work?
RSI traditionally measures the changes in a stock or cryptoasset's price over 14 periods, which can be days, hours, or weeks. The formula to calculate RSI is as follows:
RSI_14 = 100 − 100 / (1 + (AVERAGE_GAIN / AVERAGE_LOSS)
AVERAGE_GAIN = SUM_GAIN_PER_PERIOD / 14
AVERAGE_LOSS = -1 * SUM_LOSS_PER_PERIOD / 14
The formula divides the average gain the price has had over 14 periods by the absolute value of average loss.
Traders use the RSI to spot overbought or oversold market conditions. When momentum is rising, the RSI is higher (above 70) and indicates that an asset is being actively bought in the market. If momentum decreases, the RSI is lower (below 30) and a sign that interest is waning and the selling pressure is increasing.
RSI is typically constructed with 14 periods; however, traders may choose increase or decrease sensitivity to trends by toggling the periods.
Using RSI in Midline Crosses
RSI can be used to construct many different trend trading strategies. One strategy is buying / selling on divergences at extreme RSI values which indicates overbought / oversold levels. Another strategy is buying / selling when the RSI crosses past or close to the midline which can indicate the start of a trend. Additionally, RSI can be used in combination with other indicators such as moving averages to output more accurate signals in both choppy and trending markets.
Typically, an RSI of over 50 indicates a bullish trend and under 50 indicates a bearish trend. In a midline cross strategy, traders can use 50, 60/40, or 70/30 as levels of support and resistance in up and down trends. If support of resistance is broken, then a trend reversal may be imminent and traders can act accordingly.
In a hypothetical example, if the RSI for ETH breaks below 40 for the first time in an existing uptrend, then the Set automatically rebalances into 100% USDC in anticipation for an imminent sell off. If the RSI for ETH breaks above 60 for the first time in an existing downtrend, then the Set automatically rebalances into 100% ETH in anticipation for a trend reversal.
View the ETHRSI6040, the first Set that implements an 60/40 midline cross here.