The Relative Strength Index is classified as a momentum oscillator and was developed by Welles Wilder in his 1978 book, "New Concepts in Technical Trading Systems"
RSI at a Glance
- Name: RSI Oscillator
- Usage: Determines Overbought/Oversold Markets
- Trading Signals: Signals via the Divergences between RSI and Price Chart Slopes
- Timeframes: From 5 min up to 1 month
- Standard Settings: 14 periods
- Crucial Levels: RSI below 30 indicates an oversold market and above 70 indicates an overbought market
The Relative Strength Index (RSI) is a very popular technical analysis tool measuring the magnitude of a price movement and aiming to identify Overbought/Oversold Markets. RSI can be proved a reliable technical indicator for day-traders. It is better to combine RSI with an additional indicator in order to be sure about the continuation or the reversal of the master trend.
■ When the price of a financial asset is trading in an uptrend and RSI crosses from below 30 to above 30 it is considered as a strong buy signal (call option).
■ When the price of a financial asset is trading in a downtrend and RSI crosses from above 70 to below 70 it is considered as a strong sell signal (put option).
■ In general RSI below 15 indicates a solid oversold market and RSI above 84 indicates a very strong overbought market.
-RSI oscillates between the values of zero (0) and one hundred (100)
-The RSI actually calculates the recent closes relative to previous closes in order to determine if the momentum of the price is accelerating or slowing.
-RSI can be used for trading any financial market, and especially for trading the Foreign Exchange
-As concerns Forex traders, RSI is very accurate on the 5 minutes chart (M5)
-RSI can be effectively combined with MACD
-RSI can be used for determining entry and exit point
Confirming RSI in Multiple Timeframes
Day-traders can confirm RSI signals in multiple timeframes. For example, if RSI is signaling a reversal in the 5-minute chart, confirmation can derive from the 15 minute, 30 minute and 1-hour charts. Traders must be sure that the oscillator is moving in the same direction on all charts. RSI signals are more powerful when they have confirmed also in the next candle (RSI continues to point in the same direction).
When the price of a financial asset rises to a new recent high, and at the same time RSI does not point a new high then we have a divergence.
■ The existence of a divergence in combination with RSI readings below 30 or above 70 can generate an even more powerful trading signal.
This is the RSI formula:
Relative Strength Index = 100 - ----------------------------------------
1 + Average Gain / Average Loss
For standard settings (14 periods):
-1st Average Gain = Sum of Gains over the last 14 periods / 14
-1st Average Loss = Sum of Losses over the last 14 periods / 14
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