RSI Indicator - Advanced Forex Strategies

RSI Indicator

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One of the most efficient discoveries in the world of trade has been the RSI Indicator or Relative Strength Index indicator.

It was developed by J. Welles Wilder.

It is a momentum oscillator that measures the speed and change in price movements.

It can also be defined as technical momentum indicator that is used to compare the magnitude of recent gains to losses to determine overbought and oversold conditions of an asset.

Mechanism

The RSI is calculated using a simple mathematical expression.

RSI is the result of 100 – 100/(1+RS), where RS refers to the average of x days’ up close divided by an Average of x day’s down closes.

The RSI chart represents two limits, 0 and 100, which implies that RSI is calculated within this range.

If the RSI approaches 70 or surpasses it, an asset is considered to be overbought, but is deemed to be oversold if the RSI approaches 30.

How does it Work?

A two-step process is used to calculate the RSI. First of all, the average gains and losses are recognized for a specified time period, say for 14 days, which is the default time period in RSI Indicator.

The above mentioned mathematical expression is then used to calculate the relative RSI.

The RSI Indicator works much better in a sideways market.

Trend Direction

Trend refers to a cardinal rule of technical analysis.

Traders and Investors can profit by trading in the direction of the trend.

The Indicator is also used to determine and confirm trends.

When the trend is upward sloping, traders should not go short on counters and when the trend follows a downward slope, traders might look for selling short.

Divergence

The divergence rule of RSI Indicator is almost same as that of other indicators.

A positive divergence arises when the Index makes a higher bottom inspite of lower trending by share price.

A negative divergence, similarly, arises when RSI starts falling despite the higher movement of the share price.

RSI Indicator is reliable when used correctly and can be used to gauge market strength.


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