Application #5 - Chapter 14 - Momentum II: Individual Indicators - RSI

Chapter 14 covers a number of momentum indicators, the first of which is the Relative Strength Index (RSI). RSI measures relative internal strength i.e. it compares momentum strength against itself, not other coins, securities, markets etc.

It, unlike ROC, is designed to remove a) erratic movements and b) the need for a constant trading band for comparison purposes. In the case of b), RSI fluctuates between 0 and 100, with 50 being equilibrium.

Default time span for RSI is 14 days, based on it being half of a 28-day lunar cycle. This was decided by the creator of RSI, and I'm not curious enough to understand the 'why' for this but feel free to search for the answer yourself. It's advised that on longer time frames, 14 should be reduced and on shorter, increased. Oversold (OS) and overbought (OB) should be adjusted according to the chart.

RSI is better for identifying bottoms, rather than tops, as it take tops longer to build and there are more consolidations along the way so it's more prone to whipsaws.

Other indicators related to RSI include Chande Momentum Oscillator (CMO) and Relative Momentum Index (RMI).

For this analysis, I've used a 9-day RSI with 80 OB and 20 OS levels. Looking back through the years, this seems to cut out a great deal of noise and provides a reliable buy indicator. Based on these criteria alone, I see this as an excellent opportunity to buy as it's unlikely that a retrace won't occur given the unprecedented demolition of the UST stablecoin.

That said, this is part of a picture in which I have ignored volume so I would look for further evidence and some confirmations using moving averages and other trendlines to compile a full picture before making purchasing decision.

It's reassuring to see my analysis of a further move down in Application #5 was correct but I couldn't have expected something of such enormity to be the reason (along with the usual Fed hawkishness) to take us down further.

I would also like to add that the chart above is a daily time frame so I would not use this as a basis for intra-day movements.