Relative Strength Index (RSI), Technical Analysis of Profitable Traders!
RSI or Relative Strength Index was introduced by J. Welles Wilder Jr in 1978. Since it was first introduced RSI became a momentum indicator that is very widely used by traders to date. Relative Strength Index has the ability to form chart patterns, market trend lines, and support-resistance.
Another thing you need to consider when going to use this indicator is to combine it with overbought and oversold conditions and also divergence in order to be able to produce a better estimate.
The Relative Strength Index will compare the relative strength of the period’s price increase that closes above the existing closing price in the previous period with a fall in prices in the period closed below the previous closing price. Given this the resulting indicator will be at zero to 100.
The Relative Strength Index formula is: RSI = 100 – [100/1 + RS]
RS represents the average positive change of the closing price for a predetermined period of time divided by the average negative change in the closing price for the same period.
From the above formula, the overbought and oversold levels will be at 70 and 30 or it could be 80 and 20.
The price may be considered in an overbought condition when it is above 70 or 80 and may be considered in oversold condition when below 30.
The next thing you need to pay attention to is when the price makes a new high, but RSI failed to make the same move. When that happens, it can be said to be bearish divergence.
So also when there is Bullish Divergence where when the price makes new lows and RSI can not.
Relative Strength Index application
If viewed as a whole, then RSI can you benefit to pay attention to overbought / oversold condition, positive or negative divergence, and momentum of price movement.
Overbought / Oversold In RSI
In order for you to easily identify overbought and oversold conditions, there are things that need to be done simply. In general overbought condition will apply when the RSI cuts the line 70 and oversold occurs when the RSI cuts the line 30.
The 30 and 70 we have mentioned above is not a fixed and unchangeable benchmark. This is very dependent on the type of currency that is being traded, so that there are 20-80 or 40-60. You need to do trial and error in order to determine the appropriate benchmarks to use.
The guidance we can tell you all is that RSI can show accurate results when used in stable and efficient market conditions. Until now the forex market is in stable and efficient conditions, so the value of 30-70 can be used as a benchmark when it will determine overbought and oversold.
Positive / Negative Divergence
Furthermore, RSI also has a role to define positive and negative divergence which has similar usability to MACD. The interesting thing is how to read divergence on RSI and MACD is no different.
How to read it like this, when the RSI indicator moves up while the price is declining, then conditions like this can certainly make the price will move up following the movement of RSI indicator.
The opposite will also happen when the RSI decreases and the price is rising, it can be predicted the price will move down following the direction of the RSI.
Measuring the Strength of Momentum
By using RSI, you can also measure the power of momentum just like what can be done by MACD. The difference here is that in MACD crossover occurs at zero line, while RSI is at line 50.
How to measure the power of price momentum is almost the same as the MACD, which when the line penetrates the line 50 from the bottom of the RSI, then there could be an upward trend. The amount of momentum that occurs is proportional to the amount of RSI value that is happening.
How to Overcome Fake Signal at RSI
There is a time you get a fake signal when using RSI. In order to overcome such a case, we will provide an explanation of how it can be done to overcome these false signals.
The RSI needs to be in the area below 30 or is in the oversold area, you have to wait for the RSI to rise above the 30 line, in order to become an amplifier make sure there is a bullish candlestick as the RSI moves from the oversold area, make a purchase during opening the next candlestick, and place the stoploss slightly below the last swing loss.
There is also a rule of thumb that RSI must be in the overboght area above 70, you also have to wait for overbought area off above 70, make sure also there is bearish candlestick when RSI off in overbought area, do opening position at opening position the next candlestick, and do not forget to place a stop loss on top of the last swing high.
RSI provides many benefits to forex traders in order to make decisions correctly and correctly. With RSI you can easily measure the momentum strength that is happening in the market, know the positive and negative divergence, and also be able to know the overbought and oversold conditions in the existing market.
Some of the above benefits are very important you pay attention as a trader in order to get bigger profits in forex trading is done.
Nevertheless, lest you be wrong in making decisions due to false signals that are misinterpreted. Pay close attention to ensure that the received signal is truly reliable.
Hopefully the information we have presented above can provide many benefits for you all who have read it. If you are still confused with the above explanation, please feel free to ask us through the comments field below. We will be happy to answer any incoming questions.