For the second episode of DueDEX Connect we are proud to host the Cryptomist, who is going to fill us in about using the Relative Strength Index (RSI) to predict price movements and fine-tune our trading strategies.
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DueDEX: Hi to all traders in our group and welcome to the second episode of #DueDEXConnect, our weekly event getting traders and crypto experts together!
Many thanks for joining us!
Cryptomist: Glad to be here. Hopefully, I can help people use the RSI far better after this chat.
DueDEX: Surely so. First of all, we would like to ask you if you could please give the traders here a brief introduction to what the relative strength index (RSI) is?
Cryptomist: I am sure many people use the RSI differently since it can be used in plenty of ways. For me, the purpose of the RSI is to identify how much strength bulls and bears still have once they have made their pumps and dumps. Also, it can be used to identify fakeouts before a potentially larger move takes place.
DueDEX: Thanks for the quick reply Cryptomist. Here at DueDEX we are also wondering if you could tell us a bit about how do you use the RSI in your trading?
Cryptomist: You need to use various tools to complete a trade, but I love the RSI. If trading were a car, the RSI would be my acceleration pedal! I often use the RSI together with trendlines and look at what the RSI is telling me when we are within a certain triangle.
Is there a bearish divergence whilst we are within a triangle for instance? Are the higher time frames putting in double tops on the RSI, suggesting an incoming drop? Is there an oversold bullish divergence?
I combine these signals with trendlines to identify how strong the resistance or support levels are.
DueDEX: Thank you. Do you have any other analytical tools you like to use in combination with the RSI?
Cryptomist: Mostly it comes down to the RSI and trendlines (support and resistance). However, I am always looking for more tools. I have tried adding various other indicators to the RSI but I have not yet found anything that works as well as the combination of trendlines and RSI.
DueDEX: More specifically, how would you advise traders to use the stop-loss and take-profit functions in conjunction with the RSI indicator?
Cryptomist: Okay, let's say I am in a short position. There is a dump and I am making profits. I notice a 4-hour bullish divergence that is oversold and met with a support line. This is a "close position" signal that the bottom is in.
Short positions met with a higher hour time frame oversold bullish divergence are a signal to move the stop-loss tighter or take profits. When it comes to long positions, if I see a resistance level being tested with a strong higher time frame bearish divergence, this will also be a signal to close the long position and take profits or move the stop-loss tighter
DueDEX: Thanks! Again, digging in deeper here, how do you usually set the RSI length in different time frame charts?
Cryptomist: My RSI settings are on default for every time frame. I have never adjusted the time frame settings on any RSI.
I just go with the notion that the higher the time frame the stronger the signal.
Let's say I have a bullish 1-hour divergence but also a 6-hour bearish divergence. The way I interpret it is that in the very short term we may have a little more pump but then the 6-hour bearish divergence will take place and a drop will be incoming.
How I would play that? It would be to avoid entering a long position.
DueDEX: Thanks! Could you please give us some insight into how to trade profitably using the RSI? Is there any good strategy new traders can learn?
Cryptomist: Look for a 4-hour or higher time frame bullish divergence, especially when oversold. It is a fabulous buy signal. (Just beware of the long bottom wick as it could stop you out.)
A bullish divergence met with support is a good buy signal, while a bearish divergence met at resistance is a good indication that the resistance level may not break.
In a downtrend, double tops are fabulous short signals.
Furthermore, you can draw a line at RSI 50 and that region can act as a support and resistance level.
DueDEX: Thank you. Finally, here at DueDEX we were wondering if there is any case in which you think the RSI could lead to misleading results?
Cryptomist: Yes, of course. You may see a bullish divergence and then we break down and it's gone. Or a double top that breaks upwards. That is why I use them along with trendlines. For me personally, I like to use multiple tools and indicators, looking for a confluence. Only very rarely do I enter a trade with one tool alone
DueDEX: Thank you very much @cryptomist123 for your time, it is appreciated!