Ecoinometrics - Relative Strength Index

How to properly use the RSI on Bitcoin.

The relative strength index of an asset is a pure price metric supposed to encode momentum information about the price action. Typically it is used to decide if an asset is overbought or oversold at its current value. 

Now that’s for the theory. But in practice how useful is this metric? And does it work on Bitcoin? Let’s look at the data.

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Relative Strength Index

You are browsing Twitter. Some Bitcoin chart with 7 different indicators and 13 trend lines is catching your attention. The message in the tweet affirms the following:

“With the RSI at 85 it is time to get short Bitcoin and target the $12,000 level.”

Anonymous

What should you make of that?

Well, you can make whatever target you want based on whichever indicator you want. Provided you are putting on those trades with sensible risk management you might even be successful at making money this way.

But of course what we’d really like to know is whether or not the relative strength index gives you some useful information about where the price is likely to go.

Actually this is what you’d like to know of any signal. The path goes like that:

• You get data. That’s raw material.

• From the data you extract information, the signals.

• Then your goal is to see if this information leads to real insights.

Now it isn’t always possible to apply statistical methods to determine whether or not you have a useful signal on your hands. Typically you have two kinds of signals:

• Those for which you have lots of data.

• Those for which you only have a handful of points.