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Technical indicators are mathematical calculations based on the price, volume, or open interest of a security or index. They are used to help traders and investors analyze the behavior of securities in order to make informed investment decisions. Technical indicators are commonly used in technical analysis, which is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume.
There are many different technical indicators, each with its own specific calculation and interpretation. Relative Strength Index (RSI) is a technical indicator that measures whether a security is overbought or oversold by comparing the magnitude of its recent gains to the magnitude of its recent losses.
Reference [1] examined the use of the RSI indicator for trading cryptocurrencies. It pointed out,
The authors examined the strategies designed by the creator of the indicator, J. Welles Wilder, and the well-known RSI interpreter Andrew Cardwell. Automated trading systems were built for each of the applications. The research results allowed for the selection of an RSI-based strategy that was characterized by good results for all the examined indexes. The study indicated the rather low effectiveness of the basic, popular applications of RSI.
The authors developed a new strategy, which is a modification of Cardwell’s strategy. The strategy was developed on the basis of the available literature and research conducted in the article. The selected sub-optimal application of the RSI indicator allowed the achievement of above-average results, including in the time after the end of the study. The developed strategy can compete with the most effective strategies widely used on the market.
In short, the fast, frequently used RSI indicator was ineffective in trading cryptocurrencies. This is due to the loss caused by the short signals. The slower RSI indicator was more effective. However, it still lost money last year due to changing market conditions.
This article highlights the importance of performing statistical analysis instead of relying on common, but untested knowledge, and developing a robust trading system that can adapt itself to changing market conditions.
Let us know what you think in the comments below or in the discussion forum.
References
[1] Marek Zatwarnicki, Krzysztof Zatwarnicki, and Piotr Stolarski, Effectiveness of the Relative Strength Index Signals in Timing the Cryptocurrency Market, Sensors 2023, 23, 1664
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