Best Indicator in Forex Trading


What is the Relative Strength Index (RSI)?

The Relative Strength Index (RSI) is a momentum indicator used in technical analysis that measures the extent of recent price changes to assess overbought or oversold conditions in the price of one stock or another. The RSI is displayed as an oscillator (a line chart moving between two extremes) and can range from 0 to 100. The indicator was originally developed by J. Welles Wilder Jr. and featured on Technical Trading Systems in his groundbreaking book 1978 "New Concepts".




RSI calculation

The careful calculation of the RSI requires a lot of very technical and complex explanations. To fully understand how the calculation is done, traders and analysts should read Wilder's own explanation. It appears in his 1978 book New Concepts in Technical Trading Systems.

However, the index can be divided into a (fairly) simple formula:

RSI = 100 - [100 / (1 + (average price change up / average price change down)]

How does this indicator work?

The RSI is considered overbought when it is above 70 and oversold when it is below 30. These traditional levels can also be adjusted as needed to better suit the safety. For example, if a security repeatedly reaches the overbought level of 70, you may want to adjust that level to 80.

Note: During strong trends, the RSI can remain overbought or oversold for long periods of time. The RSI also often forms chart patterns that may not appear on the underlying price chart, such as: B. Double highs and lows and trend lines. Also look for support or resistance on the RSI.

In a bull or bull market, the RSI tends to stay in the 40-90 range with the 40-50 range serving as support. During a downtrend or bear market, the RSI tends to stay between 10 and 60 with the 50-60 area acting as resistance. These ranges vary depending on the RSI setting and the strength of the underlying trend of the security or market.

When the underlying prices hit a new high or low that is not confirmed by the RSI, this divergence may indicate a price reversal. If the RSI reaches a lower high and then falls below a previous low, an upper swing fault has occurred. If the RSI reaches a higher low and then rises above a previous high, a swing low failure has occurred read more.

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