✔️ Information reviewed and updated in December 2023 by Eduardo López
Today trading is one of the most popular ways to earn money, however, it is not as easy as it sounds. Trading indicators, such as the force index, are mathematical calculations that are represented on a graph as lines, and that help traders to identify the signals and trends of the cryptocurrency market.
It takes a lot of practice to learn and have all the knowledge before starting. We know that the prices of cryptocurrencies are volatile, and that the trading environment is easier than that of Forex and other stocks. For that reason, it is important to learn about the indicators before taking the first step.
✨Definition of the Relative Strength Index
The Relative Strength Index (RSI) is a momentum indicator that measures the strength and speed with which an asset's prices rise and fall. Its main objective is to find overbought and oversold levels in financial markets.
It also determines whether the trend of the underlying tool is susceptible to corrections in the opposite direction to the most recently observed movement.
The values of this index vary between 0 and 100%, and it is usually used to represent the correlation that exists between two titles.
✨ What is the strength index for?
The Relative Strength Index is used by traders in technical analysis and is used to find out whether an asset is overbought or oversold. In addition, it is one of the most reliable indicators and its signals are very useful to know when is the right time to invest.
One point in its favor is that it is one of the easiest relative strength indices to interpret, since it appears in the graphs with a value between 0 and 100 as we mentioned earlier.
So if it is above 70 it means that the security is overbought, and if it is below 30 it means that it is oversold.
✨ How is the strength index obtained?
In order to obtain the relative strength index, you must first add up all the positive (up) closing prices. This gives the value of the rising exponential moving average (EMA).
The same is done with the closing price. Now we have a drop in the value of the EMA. Then we divide the number of positive price changes (EMA up) by the number of negative price changes (EMA down) to get the relative strength (RS)
Then we derive the value of the index used, and the result of the relative strength index we remember that it must be a value between 0 and 100.
✨ Reasons to use it
The Relative Strength Index is one of the most useful indicators for different situations, whether it is to show an overbought or oversold, or to confirm a trend.
It is undoubtedly an essential part that many operators often use within their strategies. In addition, it can be used in combination with other indicators to be able to form a more complete strategy and make better decisions in the market.