Finding Optimal Entry and Exit Points using the Stochastic Relative Strength Index

awitherow (25)in #cryptocurrency • 7 years ago (edited)

Foreward

We've all been there. Sometimes we buy into a crypto at the wrong time, watch the price plummet. Sometimes we forget to lock in our profits and watch our earnings start to dwindle. Sometimes we hop on the FOMO train and end up in the red, wondering what the hell happened. Any of the above cases can be frustrating, but can be mitigated by using simple technical analysis.

When trading, it is good to use multiple technical analysis indicators. Having a solid set of indicators you are familiar with helps you to make confident trading decisions. One of the most basic, but effective indicators is the Stochastic Relative Strength Index. A lot of people use it already, without really knowing how to utilise its true power. This post will help explain its basic principles in a way that is actionable.

In upcoming courses, I will cover other indicators I use to make trades, including:

Volume
Estimated Moving Averages
Bollinger Bands
MACD

I was inspired to write this article after discussing Technical Analysis with my buddy @Kojinsama. Thanks for the help and educational inspiration!

Stochastic Relative Strength Index

This below is direct copypasta from Trading View. I would highly recommend you visit the page yourself and attempt to explain the concepts of the Stochastic Relative Strength Index to yourself as if you were a five year old. My inputs on how to USE the Stochastic Relative Strength Index indicator are below this text.

The Stochastic RSI indicator (Stoch RSI) is essentially an indicator of an indicator. It is used in technical analysis to provide a stochastic calculation to the RSI indicator. This means that it is a measure of RSI relative to its RSI's own high/low range over a user defined period of time. The Stochastic RSI is an oscillator that calculates a value between 0 and 1 which is then plotted as a line. This indicator is primarily used for identifying overbought and oversold conditions.

Sliding in Effortlessly

The Stochastic RSI tool is the gold standard among technical analysis indicators, and when used correctly can effectively mitigate risk when taking a position in the market of your choice.

RSI analysis on a coin should start at on a broad timeframe. I typically start at the 1 day candle width.

Here is an example of the 1 day market activity of Verge, concentrated on the month of May.

As you can see here on the 1D chart, we’re pretty much flatlined before things begin to move, where I’ve circled and labeled the area [1].

20% is the magical RSI indicator that can help you judge a trade, and is considered the 'oversold' line. When the coloured lines cross that barrier moving upwards, this is a bullish signal, and could be your last buy in chance before the wave goes up and is in the realm of FOMO. NEVER FOMO. The patient hunter gets the kill.

If you are skeptical on the [1] buy in due to the lack of volume or other signals, you can always wait until the next time it goes below 20% and comes back in. You can see this opportunity on the second marker, labeled [2]. Never FOMO, wait for the next wave to buy in. It is always coming! :smile:

20% is the magical Stochastic RSI indicator that you can judge a trade on. It is your last buy in chance before the wave goes up and is in the realm of FOMO. NEVER FOMO. The patient hunter gets the kill.

To get the most effective price on a buy in, go from daily chart scanning down to the hourly of the day you wish to place your trade. If the hourly Stochastic RSI is also at a low point, zoom in on the 5 minute Stochastic RSI. When this has gone between the 10-30% threshold, make attempt a buy in near the lowest price in the last two candles.

Conclusion for Buy-ins

Keep an eye on a coins RSI on the daily chart. When the coin has gone below 20% RSI and looks to begin its trend up, zoom in on closer candle widths to lock in a very calculated price. Always set a stop loss order, and play safe by looking for more bullish signals.

Don't Forget to Pull Out

Once you're in, figuring out WHEN TO GET OUT is often a stressful event. How do I best lock in profit in case of a crash? How do I make sure that I don't sell too early and miss the next leg? The Stochastic RSI can help you here too!

In the same fashion as earlier when looking for a position to buy in, I start with the larger candle widths, at a day. This is where larger waves are formed.

Here, instead of looking for the indicators dipping below 20%, I am looking for those going above the 80% indicator. Once it breaks the 80% threshold on the Stochastic RSI, I zoom in to the hourly chart.

I wait until the hourly Stochastic RSI is ascending and has reached 50%. There and then, I set my stop sell at the most recent hourly low point.

Don't be afraid to be content with a stop sell here at the 80% mark. Normally when a price rises above 80%, it is not the last time it will pop back up to that level. Since the Stochastic RSI is "relative", ideally it will be with an increased price.

This will give you room to continue to grow as the daily RSI trend continues upwards, but also enough wiggle room to account for any price fluctuations over the next few hours. Only do this in a market that is trending. If the market does not seem to be trending and this is a temporary wave, trade more aggressively and set a tighter stop to lock in profit.

Conclusion

If you're interested in additional learning resources concerning the Stochastic Relative Strength Index, check out the following tutorials:

Bitcoin RSI Tutorial - Relative Strength Index - Bitcoin Technical Analysis

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