The Relative Strength Index

The Relative Strength Index (RSI) is a widely used technical indicator that measures the strength of the price trend over a specified period. The mathematical formula backing the indicator takes into account the percentage of price moves up compared to those down. The more the up moves overweight the price drops, the more that means that the price of the asset is in a solid uptrend.

The general idea is that the faster the price is moving upward, the more likely it is that it reverts its trend down. One of the most interesting peculiarities of the RSI is that it’s very straightforward to use. The value can only range between 0 to 100, so the trader can identify easily overbought and oversold price conditions.

How to use the RSI

The default values of RSI that mark the overbought and oversold areas are respectively 70 and 30. 

For example, a value of RSI above 70 means that the asset is trading in a sustained uptrend. In the chart below, we can easily spot the areas where it’s more profitable to buy and where it’s more appropriate to sell.

Identifying the buy-zone when the RSI drops below 30 is a very straightforward approach, but that doesn’t suit a perfect trading system.

Given that the value of the RSI can only assume (theoretically) also values very close to 0, that means that the indicator can drop much lower than 30. On top of that, the RSI can stay in oversold conditions also for very long periods.

There is no guarantee of profit in buying an asset only because the RSI is flagging oversold conditions. You should employ risk management tools to reduce the risk of the trade.

RSI Divergences

Spotting overbought and oversold price areas is very useful when the market doesn’t have a clear direction. Just looking at the value of the RSI alone during trending market cycles can be misleading. The good news is that the RSI provides much more information about the price, and this information can be significant in any market condition.

You can look at the RSI in parallel with the price of the asset to spot for divergences. A classic example of divergence occurs when the price keeps marking higher highs, but at the same time, the RSI shows lower highs. That represents a signal that the uptrend is weakening, and a reversal could happen soon.

You can read more about Divergences and how to get the best out of them here.

How to trade with the RSI on Coinrule

The RSI is a handy indicator that permits to optimize the executions of any trading strategy.

Let’s consider, for example, a Dollar-Cost Averaging automated trading strategy. The goal of this strategy is to buy a coin periodically, reducing the effect of the volatility on the investment. What if you could optimize this rule buying only when the price conditions are more convenient?

When the RSI signals an oversold price condition on Bitcoin, you can catch this opportunity to accumulate more. Setting the maximum frequency of the execution, you can define how much and for how long you want to accumulate. For example, if you plan to build a long-term DCA strategy you could consider setting up the rule to run 50 times but not more than once every one day before launching the rule.

You will find more template rules based on the RSI when creating a rule!

Main Takes

We can now outline three main conclusions:

• The RSI can stay at very high or low values for long periods, so, alone, it may not spot the best timing for buying and selling. Consider combining it with another indicator to increase the preciseness of the timing of the trades.

• Since RSI can signal an overbought market condition that could remain for a prolonged time, in some cases, it may be not appropriate to consider it an indicator of an immediate reversal. Instead of using a contrarian strategy, in that case (i.e. selling the coin), it’s possible to combine the RSI with another trend following indicator, such as a moving average, to run a trend-following strategy.

• The best signals that the RSI provide are the divergence with the price. It provides useful insights about the strength of the trend to gauge the likelihood of a reversal.

Moving Averages

A moving average (MA) is a technical analysis indicator calculated as the average of prices in a particular period. The shorter the period, the more the derived line will follow the price closely, instead, with a larger period the indicator can offer a better vision about the primary trend.

The daily price movements can be driven substantially by emotions and many other variables that don’t carry significant effects in the long term, so using one or more moving averages is an attempt to isolate the chart from this noise focusing only on the macro picture.

How To Use Moving Averages

As the price of the asset trades above the MA, its slope turns positive. That is an early indicator that an uptrend is forming on that time frame. On the other hand, the price dropping below the MA represents a sign that the uptrend is weakening and it could turn into a reversal.

That visual representation provides a handy guide for traders about the state of the market. Why is this so important? 

In times of uptrend, the choice of buying has always a better risk/reward profile. The opposite is true in times of downtrend. Selling always provides better opportunities. 

Moving Average Crossover

Since the price incorporates a higher degree of volatility, it would be useful to use a short-term, or fast, MA as a proxy of the price. Using two MAs crossing increases the confidence in the signal as it reduces the noise effect of daily price moves.

A bull reversal is in place when faster MA crosses from below a slower one. That is a typical buy-signal.

In the above example, we used two MAs. One is calculated taking into account 50 daily close prices, and the other 200 daily close prices. As it’s easy to notice, the MAs appear as smoother lines, changing their slopes less often that the price chart.

Looking at the first chart above, according to this strategy you would have bought BTC at the end of 2015, considering the 50 MA crossing above the 200 MA. In this way, you would have fully enjoyed its parabolic price surge until 2018. The sell-signal was provided by the 50-days MA crossing from below the 200-days MA.

The results are impressive, just one trade would have returned more than 20 times the original investment in only about two years.

A 2000% return is indeed a remarkable performance, and it was achieved executing just one buy order and one sell order. What if we set up our indicators to provide more trading signals?

In this second example, we used the 20-days and the 50-days MAs. What happens is that the two lines appear less smooth and their intersection happens more often. Each of these crossings indicate more short-term buy and sell opportunities for those that want to exploit at best the trend.

As we can see, if we used this strategy we would have had a buy signal earlier than in the previous example with a slower MA (first buy executed at around $230 vs $290) and we could have sold at a higher price ($14500 vs $6800). However, on the other hand, we would have entered more trades. Some of them wouldn’t have been profitable, and they would have lowered your overall return.

How to trade with Moving Averages on Coinrule

You can set up an automated trading strategy based on Moving Averages just in a few simple steps with Coinrule.

The first step is to set up the condition that will trigger the orders. The block allows you to define a specific crossover of the price with an MA (eg. if the price crosses above the MA-50) or the crossover of two MAs (eg. if the MA-50 crosses below the MA-100).

The time frame defines the periods that are used for the calculation of the MAs. If you set the condition to run based on the MA-50 in a time frame of one hour, the bot will calculate the average of the previous 50 hours.

Here follows the example of a classic Golden Cross strategy on a medium-term time frame.

It’s worth noticing that you can run a rule based on the price moves of a specif coin, or on many different coins. The parameters of this rule are optimized to catch trend reversals on all the coins available on the market. More coins mean more opportunities!

For each of the buy orders generated by the first condition, the bot will check the proper conditions to sell the coins when a sell-signal is generated. Read more about the Any Time operator in this example.

The rule can generate frequent signals, to avoid over-trading, make sure to limit the frequency of the executions according to your preferences before launching the rule.

You will find more template rules based on Moving Averages when creating a rule.

Main Takes

We can now outline three main conclusions:

• Looking at the price trading above or below a Moving Average help understanding the strength of a trend.

• Moving Averages are indicators that have an intrinsic lagging nature, which means that it is impossible to identify bottoms and tops. We should use the indicators to interpret the Momentum and the underlining strength of a trend (both upward and downward) and to trade accordingly.

• Trying to reduce the lag of the indicator changing its parameters provides more signals. Out of these more signals, some will be very useful, some will be misleading. You can adjust the strategy adding more conditions to filter out the less interesting opportunities.

Contrarian

A market cycle is “lateral” when it oscillates into a well defined range. The lower bound is the support level, where buying forces overwhelm the sellers. On the upside, the price is capped by the resistance, where, the selling pressure is stronger.

Look at the market, define your strategy

The best way to take advantage of this market condition is to sell the price rally, waiting to buy when the price retraces.

The logic behind this strategy is:

• Buying when the price drops sharply in a short period, assuming it moves in a trading range, it should bounce on the support.

• Selling when the asset is experiencing a sudden price increase, assuming it moves in a trading range, it should retrace below the resistance.

One possible taking advantage of this set up is the following. First, find a coin whose chart looks like the one above, then define the precise price levels that bound the range you want to trade. For example:

Bear in mind that sometimes the price doesn’t reach the expected level as the market tends to anticipate the moves. Adjust the prices accordingly.

Another approach consists of including in the rule more coins, for example all the coins in your portfolio or all those traded on the market. In this case, you will set up price changes that will trigger the orders. Look at the charts. You can create some testing-rules on the Demo exchange to adjust the price percentage that you find more profitable.

We are working on adding technical indicators, such as Price Oscillators (e.g., the RSI) that will allow the creation of more advanced trading strategies!

Trend Following

A  way to identify a new uptrend developing is to look for sudden and strong price movements. In May 2016, BTC had a daily price change of more than 11%. That day, the price change alone flashed a strong “buy” signal.

Of course, a trend following strategy should always try to avoid the FOMO traps. To do that you need to catch the price moves that show significant underlining strength, in this case the risk/reward of the trade will be more interesting. Usually, a strong price move at the beginning of a new trend is also coupled with a significant volume increase.

With Coinrule, it’s easy to set up an automatic trading strategy, to buy when certain price conditions are met.

In the example shown, we built a rule that will promptly buy the asset that has a price change of more than 5% and a volume increase of 500% in the last 3 hours. When the condition is met, the algorithm will send a buy order of 100 USD worth of that coin to the exchange.

You can also define when to take profit on that trade within the same rule. After buying the coin the bot will look for the additional price condition that will trigger the sell order.

On the other hand, the sign of a major uptrend developing could be represented by the breach of a significant price level. A resistance is a price that historically has proven to be difficult to overcome. Only a very solid underlying demand for the asset can revert the trend, and very often that is the signal that a new uptrend is starting.

For example, during 2018, every time LINKBTC cleared a previous high, that lead to a new leg up in the uptrend. The more significant was the resistance breached, the more solid was the upward price movement generated. When finally in January 2019 the All-Time-High was passed, the price spiked around 30% in a few days.

These are the signs of a sustainable uptrend we are looking for to implement a trend following strategy. Please note that the described trend was so strong, that the price increased more than seven-fold in 6 months.

The price levels are editable at any time so you can adjust your rule depending on the ongoing market conditions. We are also working on adding technical indicators to the rule conditions for a more advanced trading experience!

Dollar-Cost Averaging Accumulation

Using charting analysis, you can identify critical price levels and decide to buy a small portion of the asset with different orders. In the example above, we identify a specific condition (a particularly “oversold” status of the technical indicator) to decide to send a relatively small order to accumulate to our position.

Distributing your buy order across a more extended period of time, gives you the possibility of buying also at a lower price, lowering your average cost of purchase. This strategy is called Dollar-cost averaging (DCA), and there are two ways to implement this strategy.

Time-based Dollar-cost averaging

You can set up periodic buy orders, no matter what the market conditions will be. If you spread your orders across a sufficiently long time frame, you will be able to reduce the volatility of your executions.

A trading bot like Coinrule allows to set up a long term strategy in just minutes and work for you 24/7 for weeks or months!

Price-based Dollar-cost averaging

Another approach is to set up a price threshold that you consider a convenient level to buy. Every time the price drop below that level, the bot will send a buy order.

It’s very useful to use this logic if you want to prevent executions at undesired prices, but bear in mind that if you set a price too low you will have less chances to accumulate your coin.

Also, if you set up a rule like this, remember to define how often maximum you want to execute a buy order to avoid over-trading!

The “Coinrule way” to run a Dollar-cost averaging strategy

While you are accumulating your coin, at the same time you can also take profit on part of your position. Selling part of your coins back to your base currency will give you the possibility to accumulate more and for a longer time. Quite smart!

In all these cases all the parameters are fully customisable to meet every traders’ need. Whatever parameter you will set, the rule will run automatically 24/7, so you won’t miss a dip of your favorite coin anymore!