Measuring RSI as a Momentum Signal for a Crypto Model

How Relevant is the RSI as a Momentum Signal on Bitcoin and other Altcoins?

Summary of Contents

We will go through how we achieved these results in this article

• Introduction

  • The Relative Strength Index (RSI) is frequently misused by inexperienced traders.

  • Emphasis on avoiding categorizing these individuals as professional traders/investors.

• RSI's Purpose and Calculation

  • Used to gauge market momentum and trends.

  • Calculated using average price gains and losses over typically 14 periods.

  • Scaled between 0 and 100.

• Measuring Validity of RSI Signals

  • Common misconceptions about buying/selling based on RSI without understanding underlying principles.

  • Introduction of "buckets" to better analyze RSI values.

• Bucket System for RSI

  • Bucket 1 (0-20): Strong selling pressure, potential for price reversal.

  • Bucket 2 (20-40): Undervalued condition, possible bullish reversal.

  • Bucket 3 (40-60): Neutral area, balance between buyers and sellers.

  • Bucket 4 (60-80): Overvalued condition, possibility of bearish reversal.

  • Bucket 5 (80-100): Strong buying pressure, potential for price peak or reversal.

• Application on Top 50 Assets on Binance

  • Allocation of RSI values into buckets.

  • Most occurrences by bucket.

• Analysis of Signals from Buckets

  • Contrary to popular belief, higher returns often seen in higher RSI buckets.

  • Study of median returns to avoid skew by outliers.

  • Top performing buckets indicate strength tends to persist.

• Longevity of Signals

  • Signal strength decays after around X days.

  • Positive skew observed in the signals, useful for strategy building.

• Data Visualization

  • Histograms showing skew towards right, indicating more frequent gains than losses.

• Conclusion

  • Importance of testing assumptions in trading.

  • Understanding the market and making informed decisions based on analysis.