What Does the Stochastic RSI Help You with?

This article is a continuation of the introduction blog written on the Stochastic RSI. The StochRSI was developed by Tushar S. Chande and Stanley Kroll and comprehensive in their book “The New Technical Trader,” first published in 1994. While technical pointers already existed to show overbought and oversold levels, the two developed StochRSI to improve sensitivity and generate a greater number of signals than traditional pointers could do.

The StochRSI deems something to be oversold when the value drops below 0.20, meaning the RSI value is trading at the lower end of its predefined range, and that the short-term direction of the underlying security may be nearing a low a possible move higher. Conversely, a reading above 0.80 suggests the RSI may be reaching extreme highs and could be used to signal a pullback in the underlying security.

Along with identifying overbought/oversold conditions, the StochRSI can be used to identify short-term trends by looking at it in the context of an oscillator with a centerline at 0.50. When the StochRSI is above 0.50, the security may be seen as trending higher and vice versa when it’s below 0.50.

The StochRSI should also be used in conjunction with other technical indicators or chart patterns to maximize effectiveness, especially given the high number of signals that it generates.

In addition, non-momentum oscillators like the accumulation distribution line may be particularly helpful because they don’t overlap in terms of functionality and provide insights from a different perspective.

The Difference Between the Stochastic RSI and the Relative Strength Index (RSI)

They seem similar, but the StochRSI relies on a different formula from what generates RSI values. RSI is a derivative of price. Meanwhile, stochRSI is derivative of RSI itself, or a second derivative of price. One of the key differences is how quickly the indicators move. StochRSI moves very quickly from overbought to oversold, or vice versa, while the RSI is a much slower moving indicator. One isn’t better than the other, StochRSI just moves more (and more quickly) than the RSI.

Limitations of Using the Stochastic RSI

One downside to using the StochRSI is that it tends to be quite volatile, rapidly moving from high to low. Smoothing the StochRSI may help in this regard. Some traders will take a moving average of the StochRSI to reduce the volatility and make the indicator more useful. For example, a 10-day simple moving average of the StochRSI can produce an indicator that’s much smoother and more stable. Most charting platforms allow for applying one type of indicator to another without any personal calculations required.

Also, the StochRSI is the second derivative of price. In other words, its output is two steps away from the actual price of the asset being analyzed, which means at times it may be out of sync with an asset’s market price in real time.

What Is the Stochastic RSI?

The Stochastic RSI (StochRSI) is an indicator used in technical analysis that varies between zero and one (or zero and 100 on some charting platforms) and is shaped by applying the Stochastic oscillator formula to a set of relative strength index (RSI) values rather than to typical price data. Using RSI values within the Stochastic formula gives traders an idea of whether the current RSI value is overbought or oversold. To put it simply, Stochastics and RSI are based off of price, Stochastic RSI originates its values from the Relative Strength Index (RSI); it is essentially the Stochastic indicator applied to the RSI indicator.

The StochRSI oscillator was developed to take benefit of both motion indicators in order to create a more delicate indicator that is tuned to a specific security’s past performance rather than a comprehensive analysis of price change.

The Formulas For the Stochastic RSI (StochRSI) are:

StochRSI= RSI−min[RSI]

max[RSI]−min[RSI]

Where:

RSI = Current RSI reading;

Lowest RSI = Lowest RSI reading over last 14 periods (or chosen lookback period); and

Highest RSI = Highest RSI reading over last 14 period (or lookback period).

How to Calculate the Stochastic RSI

The StochRSI is based on RSI interpretations. The RSI has a contribution value, typically 14, which tells the pointer how many periods of data it is using in its calculation. These RSI levels are then used in the StochRSI formula.

Record RSI levels for 14 periods.
On the 14th period, note the current RSI reading, the highest RSI reading, and lowest RSI reading. It is now likely to fill in all the formulation variables for StochRSI.
On the 15th period, note the current RSI reading, highest RSI reading, and lowest reading, but only for the last 14 period (not the last 15). Compute the new StochRSI.
As each period ends compute the new StochRSI value, only using the last 14 RSI values.

In the next blog will talk about talk about what the StochRSI tells us, how to use it to your advantage and the limitations that it can come with, so stay tuned.

How to Use the MACD Indicator

MACD is an abbreviation for Moving Average Convergence Divergence. This tool is used to recognize moving averages that are representing a new movement, whether it’s bullish or bearish. Our utmost significance in trading is being able to find a trend, because that is where the most money is made.

With an MACD chart, you will usually see three numbers that are used for its settings.

The first is the number of periods that is used to calculate the faster-moving average.
The second is the number of periods that is used in the slower moving average.
And the third is the number of bars that is used to calculate the moving average of the difference between the faster and slower moving averages.

How to Trade Using MACD

Because there are two moving averages with dissimilar “speeds”, the faster one will noticeably be faster to react to price movement than the slower one. When a new trend ensues, the fast line will react first and eventually cross the slower line. When this “crossover” occurs, and the fast line starts to “diverge” or move away from the slower line, it often designates that a new movement has formed.

The fast line crossed under the slow line and properly identified a new downtrend. This is because the difference between the lines at the time of the cross is 0. As the downtrend begins and the fast line deviates away from the slow line, the histogram gets bigger, which is good indication of a strong trend. There is one drawback to MACD. Naturally, moving averages tend to lag behind price. After all, it’s just an average of historical prices.

Since the MACD signifies moving averages of other moving averages and is smoothed out by another moving average, you can imagine that there is quite a bit of lag. However, MACD is still one of the most favoured tools by many traders.

The Future is Now with XcelToken Plus

Recently, the CEO of XcelLab Gyanendra Khadka has announced the release of the upgraded version of the popular XcelToken, with the aim of changing the ecosystem of utility tokens around the world.

“XcelToken Plus” is the upgraded version of XcelToken, which is an ERC20 token on the Ethereum Blockchain Platform, that is painstakingly crafted with the purpose of driving mass adoption of crypto in the mainstream industries at touch our lives, building and fostering a large crypto-community within the hospitality, retail and gaming sectors. For example, travel industry alone is worth over $7 trillion and is growing at over 11% per annum.

XcelLab is proud to announce that XcelToken Plus is now available for trading on 14 well reputed exchange platforms under the ticker name XLAB.

Here’s a list of platforms that one can now use to trade the utility token- XcelToken Plus (XLAB) on:

ABCC – A world-class Digital Assets Exchange, aiming to provide a frictionless, user-centric trading experience.

LIVECOIN – A modern, safe trading platform for accessing cryptocurrency exchange markets with simple interface and low trading fees.

P2PB2B – An advanced cryptocurrency exchange that works for the benefit of its users.

MERCATOX – A modern convenient service for accessing e-currency and cryptocurrency exchange markets.

HOTBIT – A professional digital asset exchange platforms that provide trading services among major digital currencies like Bitcoin, Litecoin and Ethereum for users from all over the world.

LATOKEN – A rapidly growing crypto exchange focusing on liquidity for new tokens.

BITKER – Provides hundreds of trading pairs for global users, safe and easy to use, convenient and reliable digital asset exchange.

COINGEO – Fast, Secure and reliable, make the platform a complete station for traders. XcelToken Plus is a preferred token on this Exchange platform.

PACTBIT: Is a system that allows you to trade at home or office and on Windows-based program provides a secure and Convenient interface.

HIBIT: Financial Security, Asset Separation, 2-Factor Authentication

ECOINEX: A system for protecting your assets with security and transparency.

WEBITRX: Strives to keep your assets grow in security and transparency.

WEBITRXHK: is a system that allows you to trade at your convenience, while providing security and transparency.

BORABIT: Low fees, Strong Trading Aids and Coin Price Comparison by Exchange.

Mr Khadka (CEO) stated that “The utility token; XcelToken Plus, will enable the crypto community to use the token in their day to day transactions, such as mobile recharge, travel and retail – few of the most important spheres that touches our lives on an everyday basis. So, having a token that allows you to transact in these spheres will enable cryptocurrencies to enter the realm of mainstream adoptions in a faster pace.”

Further to his previous statement Mr Khadka, added “… we have a team of dedicated senior developers across USA, Mexico, Nepal, India and Singapore, who are working to ensure, the token and the platforms are built keeping in mind world class standards, to make sure that the crypto-travellers and traders receive best services and offers” And this he says “will help increase the possibility of growing the cryptocurrency community and stabilizing the significance of utility tokens.”

XcelToken Plus, a one of a kind utility token, aside from its tradability, is now adopted into usage on platforms such as:

XcelTrip– An online travel booking platform based on the blockchain technology, aims to disrupt the ever-growing trillion-dollar travel industry, through challenging the monopoly of the ecosystem by giving the power back to the users. XcelTrip, allows travellers to check-in at over 800,000 hotels and book tickets with over 400 airlines. XcelTrip makes sure to give the power of bookings and anonymity to the consumer, the consumer is exempt from paying extra credit card charges and other miscellaneous expenditures.

On this decentralised travel platform, aside from XcelToken Plus, crypto-travellers can also use Ethereum, Bitcoin, Binance coin to book airline tickets and hotels.

Crypto-travellers around the world can either log on to XcelTrip.com or download the XcelTrip app, available on both android and IOS, to book their travels, with amazing cashback offers that run all throughout the year and for those travellers who contribute content and inventory there is a proposition that allows them to earn XcelToken Plus on the XcelTrip platform.

Mr. Raghav, XcelTrip CMO adds “ Crypto community can now book over 800,000 hotels and 400 airlines on XcelTrip.com and earn up to 50% cash back on their booking, this is an offer that is sure to disrupt the travel industry, we are passing on massive benefits to users and community, to kick-start the crypto mass adoption in travel industry. Further, users can use our XcelPay platform for mobile top-up and purchase gift cards from top brands such as amazon, Walmart, target, uber and more.”

XcelPay– A merchant POS, digital payment wallet and crypto payment gateway. XcelPay is integrated into an easy to use, crypto wallet that is enabled for both mobile and tablet use, makes sure that sending and receiving payments in crypto is a secure process.

XcelPay aims to cut out unwanted middle men, bank/card transaction fees, currency conversion fees that produce a damaging effect on the retailer’s and consumer’s margins, making this a shopaholic’s ultimate companion.

Through XcelPay, the users can now top up their mobile phone plans with 900 different carrier services and in 160 countries, with Ethereum and XcelToken Plus.

XcelToken Plus is also a preferred token on Bitnare, a social media platform that allows for the people of the crypto-community to network with each other within the community with a lot of comfort. XcelGames, where the player can collect coins on the game and convert them into XcelToken Plus. The app is available for both IOS and Android devices.

How to use the Ichimoku Cloud indicator while trading?

As mentioned yesterday we will be going over Ichimoku Cloud trading structure, which does not need any extra pointers on the chart. This Ichimoku trading strategy is relevant for every trading instrument and timeframe.

Placing a trade when the price closes outside the cloud

This technique could also be coined the Ichimoku Breakout Trading Strategy. This is because the trade trigger occurs at the point the price breaks through the cloud. First, you open your trade in the direction of the respective breakout and then hold the position until the security breaches the Kijun Sen (blue line) on a closing basis.

Sequence of Events

When analysing the price action for potential trade entries, we walked through the following sequence of events:

First, the price of Intel goes through the Tenkan Sen (red) and Kijun Sen (blue) in a bullish fashion. Although these indications are bullish, we still need extra approval to take a long position.

Second, the price of Intel breaks through the cloud in a bullish fashion as well. We open a long position (first green circle) and wait for the best strategy.

Third, Intel had a few unsuccessful attempts to break the Kijun Sen (blue), but lucky for us, the price never breaks on a closing basis, and the upward trend remains intact.

Fourth, the price breaks the Kijun Sen in a bearish direction and closes below the Kijun Sen. This price action means we need to exit our position and begin seeking other opportunities.

So, What Happens Next?

In the next 4 hours, the price does another bullish break through the Tenkan Sen (red) and the Kijun Sen (blue). At the same time, Intel also breaks the cloud in a bullish direction once again. We take another long position based on the bullish price action. On this run-up, Intel, unfortunately, broke the Kijun Sen (blue) on a closing basis; therefore, we exited our long position with a decent profit.

These are two trading examples of how Ichimoku Cloud trading strategy could be effectively applied. Note that in the second case, the signal to exit the position wasn’t very strong, but should still be honoured.

Understanding Ichimoku Kinko Hyo

Ichimoku Kinko Hyo translates as “one look equilibrium chart”. It was designed specifically for quick and easy decision making. Ichimoku Kinko Hyo is a gauge that looks compound to traders with 5 seconds attention spans. Once you know what it does, it makes your crypto trading choices way faster though. Mastering Ichimoku Cloud transaction really brings you one step closer to the actually realistic goal of crypto trading: Creating high-probability verdicts without costing you your whole day inspecting your Trading View charts.

Ichimoku Cloud Lines Explained

The Senkou and The Kumo

“Senkou span” is the name for the borders of the filled cloud, or “Kumo cloud”. The span is filled with green color in case the market is bullish. It will turn red in bearish markets, when the two spans swap.

Senkou lines are major support/resistance areas – they attract the price. Traders set their entries, exits and stops around them – usually leveraging additional information from other indicators.

The TK lines and The TK Cross

The “TK lines”, or Tenken and Kinjun, are the balance lines – fast and slow moving averages.

They are moving averages, so traders will look for their cross when they are looking for a trend reversal. Because of their names, this cross is called “TK cross”.

Nonetheless, TK lines are also important when there is no cross in sight. If the price sticks around them, it signals that the asset is neither overhyped nor underpriced. If the price action travels very far from the TK lines, it signifies the price is way out of balance and a pullback is likely, but it is by itself not a trigger to open a position for the pullback.

In more balanced markets the price stays around these lines and traders watch how it is bouncing off them or crossing them when they are looking for a good entry.

The Chinkou

The “Chinkou” span is a lagging indicator, use it to confirm a trend strength. Chinkou line above the candles means the market is strong. When there is a strong action and the lagging line crosses the candles, it is a sign the trend is weakening and becoming undecided.

Stay tuned for tomorrows blog to understand how to read the Ichimoku Kinko Hyo.

Understanding Liquidity

The concept of liquidity has many facades to it. One way to define liquidity is “the ability of an asset to be converted into cash readily on demand”. An additional way of viewing at it is when any asset can be bought or sold at its fair price. Liquidity thus means that there aren’t discounts or bonuses devoted to it during buy or sell and it’s easy to enter and exit the asset. It is believed as more of an item is accepted and sold, the chances of charging premiums or giving discounts lower and such an asset usually trades around ‘what it is worth’.

The forex market is often defined as a liquid market with an average turnover of more than $5 trillion daily as of April 2016 according to the Bank for International Settlements (BIS) while real estate is a classic example of an illiquid asset. Property as an asset is less liquid, requiring huge investments into physical form, monotonous procedures and smaller market.

Liquidity is significant for any tradable asset, which comprises the math-based currency Bitcoins as well. Liquid markets are deeper and smoother while illiquid market can put traders in a spot from where it’s hard to circumnavigate the way out. Bitcoins have seen a significant grown in the last five years of its existence from 50 Bitcoins in 2009; the circulation is more than 16.78 million today. The graph above depicts the growth of Bitcoins in terms of circulation. However, the virtual currency has viewed episodes of illiquidity. Let’s take a look at the main factors which influence the liquidity of the Bitcoins.

How to tell if a market is liquid

There are three significant indicators that can help determine if a market is liquid or illiquid: 24-hour trading volume, order book depth, and the bid-ask spread. the bid-ask spread is the difference between the lowest ask price and the highest bid price.

However, the order book might not always be an accurate representation due to factors like stop-limit orders and iceberg orders, which are not always visible in the order book. Liquidity is extremely important when considering your trades. It is one key factor for easily entering or exiting a particular market.

Economic Bubble: The Tulip Mania

Before we get into the story of The Tulip Mania, we ought to understand economic bubbles, what they do and how they come about?

A bubble is an economic cycle categorized by the rapid escalation of asset prices followed by a contraction. It is created by a surge in asset prices unjustified by the fundamentals of the asset and driven by excited market behaviour. When no more investors are eager to buy at the preeminent price, a huge sell-off occurs, triggering the bubble to deflate.

How a Bubble Works?

Bubbles form in economies, securities, stock markets and business sectors because of a change in investor behaviour. This can be a real change — as seen in the bubble economy of Japan in the 1980s when banks were partially deregulated, or a paradigm shift — which took place during the dot-com boom in the late 1990s and early 2000s. During the boom, people bought tech stocks at high prices, believing they could sell them at a higher price until confidence was lost and a large market correction, or crash, occurred. Bubbles in equities markets and economies cause resources to be transferred to areas of rapid growth. At the end of a bubble, resources are moved again, causing prices to deflate.

The Tulip Mania

In the 17th-century Netherlands was the perfect place for the Tulip Mania to break out. Newly independent from Spain, the Netherlands quickly became a major European power. Dutch traders were very successful, spreading wealth and an increasing demand for luxuries throughout the country.

Similarly, tulips are a perfect commodity for a futures market (when parties sign a contract to deliver specific goods or services for a set price at a specified time in the future). Since tulip bulbs can only be uprooted between June and September, all purchases outside this time frame took place as futures trades, where traders signed contracts to deliver at the end of the season. This means that as prices were soaring and deals made (sometimes even ten transactions per bulb a day), no bulbs actually changed hands.

As usual with financial bubbles, things got out of hand quite quickly. Botanists competed with each other, trying to cultivate more and more spectacular flowers. Semper Augustus was one of the most coveted cultivars during the craze. By 1637, prices were stellar. According to contemporary records, a whole house was offered for 10 bulbs of Semper Augustus. And the offer was refused in favour of a better one. Speculators rushed the market, selling all their properties and possessions to bid on tulip bulbs. During the last month of the bubble, prices skyrocketed by 1,100%.

In February 1637, the tulip bubble ruptured. Buyers began to stop fulfilling their contracts, and the whole artificially-generated craze came crashing down. Fortunes were lost overnight and the value of the tulip took a plunge into the ground (where it really belongs).

Some scholars argue whether the Tulip Mania was a real financial bubble, since its bust didn’t send the Netherlands into a full-blown economic crisis. Although the Dutch government had to intervene to save many investors, it’s true that the country’s economy as a whole didn’t suffer long-lasting consequences. And the tulip is still one of the things the Netherlands is best known for.

The story of the Tulip Mania may seem funny today. Who would give their whole house in exchange for a flower that blooms for a week? But bear in mind that it’s easy to be smart in retrospect. Recognizing a bubble and trying to stop it is a lot more difficult when it’s actually happening everywhere around you.

Problems With Game Theory Mechanics in Distributed Systems

We have already understood game theory and its usage in cryptoeconomics, in this blog we will look at the problems that might come with using game theory in a decentralised, distributed system. Lets quickly look at the problems that it might cause:

Despite the incentive structures and game theory mechanics driving honest behavior in the Bitcoin network, there are some important issues that are widely recognized. Centralization of mining as a result of mining pools has led to concerns that the reinforcing Nash Equilibrium of the system can be compromised through a 51% attack.

This is where malicious miners control enough of the network hashing power to fork the blockchain, overriding the coordination game played out by a decentralized network of miners. Due to this, some view incentive mechanisms as not particularly necessary or only necessary as a last resort of cryptocurrency platforms due to the complications in system logic that they create.

The empirical problem laid out by critics is that the success of game theory models in these platforms cannot be determined academically, only through practice. Some of the assumptions made by game theory models in cryptocurrency platforms revolve around a specific threshold of people acting honestly or dishonestly.

Predicating platform security on implied assumptions of human behavior can be risky, especially when there is no precedent for the technology or models being implemented.

Bitcoin as a decentralized network is built on the uncoordinated choice concept where coordination between parties is limited by the size of parties interacting with each other. Centralized mining pools do not follow this concept and therefore create a viable security concern.

Game Theory For Cryptocurrency

To understand how game theory works within the sphere of Cryptocurrency we need to get through the basics first. To know more about game theory and how it’s used in cryptoeconomics keep reading on.

Let’s first get a feel for Game theory. It is essentially the study of logical decision making made by players within the clear parameters of a classification (game, scenario, etc). It uses mathematical models and can be applied to economics, psychology, logic, computer science, distributed systems, and more. Game theory can be seen as a microcosm of human behaviour under set conditions wherein certain inducement structures and mechanisms can lead to predictable and honest behaviour by players.

In a archetypal game theory scenario, there are 3 primary components: Players, Strategies, Outcomes.

Players are the users that make decisions. Strategies are the manoeuvres that players make while simultaneously taking into account possible strategies of other players. The conclusions are the result of the players’ moves inside the system, and with the right incentive mechanisms, can be motivated to a certain route or played out recurrently with similar results.

Game Theory in Cryptocurrencies

Cryptoeconomics can be well-defined as the amalgamation of cryptography, economics, and game theory incentive models merged into distributed blockchain protocols in order to create a secure, stable, and sustainable system.

It is a very new concept, but when you really dig deep into the functionality of cryptocurrency platforms, you will see how important it is to justifying malevolent actors and endorsing honest, trust less behaviour across the network.

The best example to understand the role of game theory and cryptoeconomics in cryptocurrency platforms is Bitcoin. In order for dispersed blockchain networks like Bitcoin to remain secure and have the ability to reach the essential consensus on the blockchain, they need to remain Byzantine Fault Tolerant.

For the system to remain Byzantine Fault Tolerant, the decentralized nodes have to come to a majority agreement on the current state of the blockchain without trusting each other.

This is very difficult to accomplish and is outside of the scope of the employed cryptography, which is used to cryptographically link each block of the blockchain, not determine whether the transactions contained within the blocks are valid or which of 2 competing chains is the valid one.

Bitcoin solves this problem through its Proof-of-Work consensus model. The model works where miners need to solve computationally intensive mathematical problems in order to win the reward for mining the next block.

This solution needs to be verified by the other miners and the inherent cost of the process is electricity, a real-world asset with a financial value. The resulting chain becomes secure and very costly to manipulate or attack. The larger and more decentralized the network becomes, the increased difficulty in accomplishing an internal or external attack.

Incentive structures predicated on game theory mechanisms come into play in order to encourage the players (users and miners) in the system to act honestly. Additionally, some abstract concepts within game theory work subtly in the background.

Starting with miners, the obvious economic incentive stems from the block reward if they solve the next round of mining for the next block. The reward in Bitcoin is currently 12.5 BTC. This is important because since the miners are receiving the reward in Bitcoin, it is in their best interest for the value of Bitcoin to increase and the network to remain valid and secure.

They actively spend resources (electricity) to have a chance to win the block and thus, their efforts will be a sunk cost if they use malicious actions to attack the network and jeopardize the value of the reward. It becomes increasingly more costly to act dishonestly than it does to act honestly within the system.

This creates a positive feedback loop where miners have a consistent positive incentive to maintain the valid blockchain and mitigate against malicious actors, resulting in a secure network.

Miners can act malevolently in a number of ways, counting adding invalid transactions into blocks or mining on top of invalid blocks to gain more BTC. However, this is where game theory mechanics come to the rescue. Invalid blocks will be rejected by the majority of miners in a coordination game format where it is in the best interest financially of miners to remain with the majority and not attempt to create invalid blocks due to the inherent and increasing cost associated with doing so.

The resulting conclusion from this is that the Bitcoin blockchain is constantly in a self-reinforcing Nash Equilibrium state. The system is Byzantine Fault Tolerant due to the majority of miners working in coordination to achieve and maintain the most stable state of the network at all times.

With regards to users, their preference for the longest chain (and the most secure) is a result of a concept known as Bounded Rationality. Essentially, users are acquainted with the main chain and switching chains creates unnecessary complications. Maybe reckless, but most users assume that incentive devices are working correctly to keep miners’ power in check.

Game theory dynamics in cryptocurrencies will endure to develop and should become one of the most captivating concepts within the industry. Their role in security, rationality, and viability cannot be modest and their eventual success or demise within decentralized networks will unfold in real-time as novel platforms go live and incorporate larger numbers of users.

The field of crypto economics is just commencement, with insinuations not solely referred to cryptocurrency platforms, but to the larger progress of game theory process themselves.