Librehash Volatility RSI (Explainer)


6 min read
Librehash Volatility RSI (Explainer)

Recently in the main Telegram channel, we re-announced that there is a free indicator up for grabs for anyone that’s looking to use it.

Its called the Cryptomedication Volatility RSI, and while it may seem a bit confusing at first, this indicator can be really useful in trendy markets.

What This Indicator Isn’t

This indicator is not magic or voodoo. It is simply a technical indicator.

What is a ‘technical indicator’?

Great question. A technical indicator is a tool that provides information about a given asset based on that asset’s price action.

Take the chart below for example:

The chart posted above show’s the OHLC candles for Bitcoin on the daily resolution between October 2018 to March 2019.

Despite the price action we have for such an expansive time period, there are few questions that can be answered from the data above, such as:

  • What’s the overall trend of the price?
  • Is the price action over or underperforming prior forecasts based on the assumption of continued price trend?
  • Is the market exhibiting bullish or bearish sentiment over this time period?

And many more.

How indicators are useful

Again, to reiterate, indicators are not magic price predictions — but they do lend helpful information.

Let’s take a look at the EMA (50) [Exponential Moving Average] overlaid on that same chart (and time period):

The golden line in the chart above represents the EMA(50) for Bitcoin on the daily resolution.

The EMA(50) takes the exponential moving average of the OHLC (open/high/low/close) of Bitcoin’s price for the previous 50 days.

Below is the formula:

Source: https://www.investopedia.com/ask/answers/122314/what-exponential-moving-average-ema-formula-and-how-ema-calculated.asp

The benefit of the EMA as an indicator (vs. ‘regular’ MA / SMA) is that it places a greater weight on more recent price data (vs. an even weight across all 50 periods).

Many market analysts have observed that the EMA-50 is a great frame of reference for price action.

Thus, whenever there is a cross above the EMA(50), this is generally perceived as a sign of bullish sentiment and, conversely, a cross below conveys potential bearish sentiment.

See below:

Notice the ensuing price action after Bitcoin crosses above the EMA(50) on the daily resolution:

After Bitcoin crossed above the EMA(50) on the daily resolution [February 18th, 2019], there was an ensuing +269% appreciation in the price.

Let’s see what’s happened to Bitcoin’s price the last time that it crossed below the EMA(50).

Below is a chart showing Bitcoin crossing below the EMA(50) on the daily resolution:

Now let’s see the total depreciation in price following this cross below:

Above, we can see a -56.94% drop in the price in just a little over 3 months. Ouch.

Great, so we can use EMA(50) as an auto-buy / sell signal, right?”

No.

Again, this is just an example of how technical indicators can be used to garner more information about underlying price action such as whether its bullish/bearish, or overperforming / underperforming.

The EMA(50) is just one indicator among a never-ending list of indicators (with different methodologies, formulas and information given) that can be used to help traders assess what’s actually going on in the markets.

Librehash Volatility RSI

If you’re looking for this indicator, it can be found (for free) at this link here: https://www.tradingview.com/script/zQ1dkZQz-CryptoMedication-s-Volatility-RSI/

This indicator was created by taking various elements of a couple already existing indicators to create one consolidated indicator that could simultaneously yield the same information — essentially making life easier.

Indicators/Concepts Used

  • Bollinger Bands %B for the volatility rating
  • RSI overlay to help paint the ‘extremes’
  • Average True Range
  • Mathematical formulas between said indicators(in Pinescript) to help synthesize some of the operations to create one, smooth result

Defining the Indicator

This one is yet another custom indicator. Fortunately, it is just as easy to parse and dissect as the previous two were. The primary benefit of the Volatility RSI is that it tracks two things simultaneously:

  1. Expansion/contraction in price
  2. Increase/decrease in volatility This is important because, while it may seem as if these two qualities are generally related to one another, they are not.

There may be periods where the price increases while the volatility is decreasing. Conversely, price can decrease while the volatility increases (we saw this many times in the bear market).

Crafting Such an Indicator

In order to craft this indicator, it was necessary to use the underlying math in the Bollinger’s Bands as the foundation of our calculations since the BB uniquely overlays a volatility reading to the price by producing ‘bands’ around the price action based on points that are 2.5 standard deviations above and below the price at any given point, with the averages being calculated on the basis of a predefined lookback period.

Checking Out What the Volatility RSI is Showing in the Example Below:

In the chart above, we can see that the indicator :

  1. Produced a sustained ‘sell signal’ (forecast of price decrease) in late June 2019
  2. Is on its way down, indicating decreased volatility

Let’s Take a Look at the Corresponding Price Action

As we can see in the price chart above, the price has decreased markedly from the time of the ‘sell signal’ produced by the Volatility RSI.

Additionally, we can also observe clear and obvious consolidation in the price action as well (as identified above).

Reliability of the Librehash Volatility RSI

For those that did not notice, the Volatility RSI is a very slow indicator.

What this means is that it does not produces signals frequently, but when it does, they tend to be significant.

Let’s check out the last time that the Volatility RSI signaled a ‘buy’ with increasing volatility:

As we can see in the chart above, the Volatility RSI last signaled back the week of December 17th, 2018 (on the weekly resolution).

That sustained buy signal lasted for over 6 months.

Let’s see what the corresponding price action looks like:

Impressively, it appears that the Volatility RSI was able to successfully signal the proverbial ‘bottom’ of Bitcoin’s bear market at the point that the buy + increasing volatility signal was given.

This signal was also sustained all the way until the last week of June (on the weekly resolution), which essentially serves as the ‘top’ of this price run, yielding an appreciation of +337.58%.

What is most remarkable is the fact the Volatility RSI was able to retain the sustained buy + increased volatility signal for well over six months, without being ‘faked out’ by intermittent periods of consolidation or outright bear movements.

Given this fact (and numerous other occasions where this indicator has provided a comparable performance), this indicator deserves to be taken seriously as a long-term forecaster of price action.

Disclaimer

[Disclaimer]: None of what was posted above is financial/investment advice and should not be perceived as such, you are not reading this on a platform designed to give such advice or solicit investment into any product in the cryptocurrency markets or elsewhere. These are merely observations and insights that are pertinent and relevant to cryptocurrencies because of their inherently financial nature as innovations in the financial technology sphere.

Example: (i.e., one cannot assess the longevity of the Proof of Work mining model without assessing the price of Bitcoin, making cryptocurrencies a unique technological innovation that requires a more holistic assessment of what constitutes “financial/investment” advice. In this case, nothing that has ever been posted in this channel is meant as such.)

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