It
is very important to have a strategy when trading cryptocurrencies. The volatility of the cryptocurrency market can lead you to make the wrong decision. However, using indicators when creating your strategies will make it easier for you to make decisions. In this article, we will give the answer to the question “What are RSI and Bollinger bands?” Then we’ll test the two strategies separately to see which one works better.
What is RSI (Relative Strength Index)?
The RSI is an indicator that indicates the regions in which a financial asset is sold or bought a lot. It is roughly the ratio of the number of days an asset has gained in the past (if we are looking at it in the diary) to the number of days it has lost. It is usually viewed from a 14-day period. If the RSI is below 30, it is described as an oversold zone, and above 70 is described as an overbought zone. So above 70 it is conceivable that the price will fall because it is too high, and below 30 it will rise because it is too low. In fact, the RSI does not give a buy and sell signal. It’s about how you set up the strategy. As soon as the RSI first rises above 70, if you think that the momentum will continue to rise, this could be a buy signal for you. In this article, we tested the strategy we built on the RSI in the last 20 days of hourly data as a strategy to return to the mean. When we simulated a strategy to sell the cryptocurrencies we bought below 30 and above 70, we saw a cumulative gain of 72 percent for BTC, ETH, LTC, XRP, XLM and BAT. This is just an example of the RSI that we created to illustrate as a strategy. Gains and losses may occur at different series and times. For this reason, it would not be correct to say that the RSI always wins.
According to the RSI value below, the red inverted triangles represent the sell signals and the green triangles represent the buy signals.
What Are Bollinger Bands?
Bollinger bands are usually charts that show the area of 20 days up to 2 standard deviations around the 20-day moving average. Here, 2 standard deviations above the moving average indicate overbought, prices are above the normal level, and 2 standard deviations below indicate the oversold zone. Based on the strategy of returning to the average, we have again built our strategy on selling in overbought areas and buying in oversold areas. This time, while 6 cryptocurrencies seem to have gained more in cumulative, BTC seems to have earned less than the RSI. This is a very good example of how different wins can be made in different series. For this reason , you can consider creating your own strategy according to the crypto coins you will invest in.
In the buy and sell signals created according to the Bollinger band values below, the red inverted triangles represent sell signals and the green triangles represent buy signals.
In the case of Bitcoin, the RSI gained 5.95 percent while the Bollinger band gained 0.58 percent. Before declaring the RSI a winner here, it is correct to calculate the simulation of how much we would have earned if we had never bought or sold, that is, if we had held on. We started the trade at $6800 and finished at $7103 and see it gain 4.4 percent accordingly. The RSI is slightly better than this value. But we can say that the RSI owes this success to the fact that we have tested the upward trend time. When prices go up, strategies usually always yield positive results.
You can visit our cryptocurrency analysis page for more technical analysis.
NOTE: The purpose of this article is to explain the RSI and Bollinger bands practically for educational purposes. None of the analysis here is investment advice.
