The aim of every crypto trader and technical analysts is to use effective tools that helps traders make accurate predictions of the market in order to make profits. Relative Strength Index (RSI) is one of the many indicators and technical analysis tools that helps traders to measure the crypto asset momentum I.e, the speed and size of price movements.
Simply put, RSI is an indicator tool to measure the degree of recent price movements of any cryptocurrency. RSI is calculated by; RSI = 100 – 100 / (1 + RS). From the above formular, RS basically means Relative Strength which equals to the Average gains divided by the Average losses in the last N price
N in this case represents = the period of Relative Strength Index
In my opinion, Relative Strength Index is a trusted indicator because of it benefits when it comes to trading cryptocurrencies. RSI can help traders determine whether a cryptocurrency will enter into a correction phase by showing overbought and oversold signals. This is also great because it can help traders know when to enter a trade and when to exit a trade.
When it comes to RSI, 14 days is the number of days that is taken into consideration and what is utilized by the RSI indicator to analyze its average value. This 14days is set by default because the RSI captures just 14 days. It is important to know that this value can be changed at any time by the trader. Why RSI uses 14days is because sees it as an optimal time to market movements and price volatility in the market.
Interpreting the overbought and oversold signals
This is easy to do using the RSI indicator. Overbought would show a mountain like shape which indicates that the price of the cryptocurrency asset is rising. This is as a result of fear of missing out in the market. Oversold would show the valley like shape which indicates that the price of the cryptocurrency asset is dumping. This is as a result of fear uncertainty and doubts in the market.
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Reviewing the chart of CAKE/USDT
From the chart below with RSI indicator, you can see the different regions which CAKE was overbought and oversold.
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RSI indicator is a very good indicator that when used effectively and correctly can help cryptocurrency traders take advantage of the market movements and make more profits.
