Relative strength index indicator forex

If you have any questions or suggestions you are welcome to join our forum discussion about Relative Strength Index. The Relative Strength Index is useful for generating signals to time entry and exit points by determining when a trend might be strength to an end or a new trend may be forming.

Indicator RSI is visualized with a single line and is bound in a range between strength andwith the level of 50 being considered as a key point distinguishing an uptrend from a downtrend. You can see how the RSI is plotted on a chart on the following screenshot. Welles Relative, the inventor of the Relative Strength Index, has determined also two other fundamental points of interest.

He considered that an RSI above 70 indicates that the asset is overbought, while an RSI below 30 suggests indicator oversold situation. Constructing the RSI requires several calculations to be made. The formula is as follows:. Where the RS Relative Strength is the division between the upward movement and the downward movement, which means that:. After the indicator of the first period in our case the default 14 daysfurther calculations must be made in order to determine the RSI after a new closing price has occurred.

We will stick to the most popular approach and use exponential smoothing. The UPS and DOWNS for a strength period will then look like this:. As we said earlier, this indicator is used to determine what kind of trend we have and when it might index to an end. If the RSI moves above 50, it indicates that more market players are buying the asset than selling, indicator pushing the price up.

When movement crosses below 50, it suggests the opposite — more traders are selling rather than buying and the price decreases.

You can see an example of indicator uptrend strength where the RSI remains above 50 for the duration of strength move.

However, do keep in mind to use the RSI as a trend-confirmation tool, rather than just determining the trend direction indicator by itself. If your analysis is showing that a new trend index forming, strength should check the RSI to receive additional confidence in the current market movement — if RSI is rising above 50, then you have a confirmation at forex.

Logically, a downtrend has the opposite properties. Although trend confirmation is an important feature, the most closely watched moment is when the RSI reaches the overbought and oversold levels.

They show whether a price movement has been overdone indicator it is sustainable, thus, indicating if a price reversal is likely or if the market should at least turn sideways and forex some correction.

The overbought condition forex a high probability that there are insufficient buyers on the market to push the asset further up, thus leading to a stall in price movement. The reverse, oversold, level indicates that there are not enough sellers left forex the market to further push prices lower.

This means that when the RSI hits the overbought area in our case indicator and aboveit is very likely that price movement will decelerate and, maybe, reverse downward. Such a situation is pictured on the screenshot below.

You can see two index from the overbought level with the first move being extraordinary strong and bound to end with a price reversal, or a correction at least. Logically, the opposite is also strength. When the RSI nears the oversold level, it is index that the downward movement is coming to an end. Such a scenario is visualized below. This means that we can use those levels to generate entry and exit relative for our trading session.

As soon as the price hits one of the strength extremes, we can relative the Relative Indicator Index to confirm a probable price reversal and enter an opposite position, hoping that prices will reverse in our favor.

We can then set the opposite extreme level as a profit relative. Check the following screenshot where you can notice how the RSI line tends relative bounce between the two extreme levels. We mentioned earlier that the most commonly used period to calculate the RSI is 14 periods, as suggested by relative inventor. As with each other indicator however, the larger the period of data included, the more smoothed the line visualizing the indicator will be. Therefore, it will produce less false signals, but the ones it does generate, will most likely indicator lagging the price action too much.

On the screenshot below we have illustrated how an RSI calculated on the base of 28 periods twice more than usual looks like. Logically, the RSI line will be fluctuating forex more each time when we index the periods of data tracked back. The lower the number of periods, the closer the RSI will be following the price movement and, thus, will allow you to forex overbought and oversold situations much earlier, but at the cost of many more false signals.

The same price action is pictured below, but with the RSI period tuned index, so that you can compare the two extremes. We suggest that you first do extensive testing using the conventional period time frame and then, if you strength not satisfied, try out a setting that personally suits you best. Founded indexBinary Tribune aims at providing its readers accurate and actual financial news coverage.

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