There is a lot of speculation going on about the recent price activity of Bitcoin and what it all means.
Some people are a bit glass half empty and are quick to say this happened all too fast, we’re doomed for a crash back down to $3,000. Some are glass half full and are declaring this the beginning of another parabolic bull run. It’s enough to make you lose sleep at night if you don’t know how to analyze this situation yourself.
So in an effort to bring you some knowledge and comfort, here is one tool that can assist you.
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RSI
Relative Strength Index: a rating system that takes into account the average gain periods and average loss periods over a set amount of time. It is a mathematical equation that will produce a number from 0-100 based on the input data.
The higher the number the more dramatically a coin is overbought. More precisely, if a coin has an RSI below 30 it is considered oversold and therefore could be considered a good time to buy, and if a coin has an RSI over 70 it is considered overbought and could be considered a good time to sell.
This particular index can be calculated based on different set time periods, you’ll most commonly see things like RSI-14 or RSI-21, this means the index is calculated based on the past 14 or 21 days.
There is another tool called a GTI Global Strength Indicator which gives feedback on the intraday timeframe.
You can think of it like this, the smaller the time frame for these indexes, the more precise or reactive the reading will be.
If you are a day trader, you’re most likely looking at the GTI Global Strength Indicator or a 14 day RSI. If you are interested in analyzing coins to buy and hold, it will be more beneficial to take into account a more long term period RSI.
Remember that this particular index can be calculated for any time frame.
Why should you care about an RSI reading?
They can help predict trend reversals.
Kind of like a pendulum, as the price pushes past resistance levels, the more quickly it does this, the higher the chances it will swing back the other way. I know that isn’t a perfect analogy, but it’s a good reminder for those who are concerned about the short term, that the market can go back and forth.
Consider these words from this particular article: “ Although past performance isn’t indicative of future action, it has become apparent that continual short-term gains cannot be sustained forever, even in the often irrational crypto asset space."
On the other hand, for the long term holders and those who choose to dollar cost average and slowly accumulate, it’s much easier to sit back, keep your eyes on the future and watch it rise over time.
ADDITIONAL READING/LINKS:
Glass half empty
Glass half full
Very helpful article for analyzing coins