What is the Relative Strength Index or RSI?
Relative Strength Index (RSI) is a very popular technical analysis indicator (oscillator) which aims to identify overbought and oversold market conditions of any traded asset. RSI is used in Forex, Stocks and in other forms of online trading. RSI is scaled from 0 to 100. Generally speaking, the RSI level of 70 or more indicates overbought market conditions, while the RSI level of 30 minus indicates oversold market conditions.
■ RSI 70+ Overbought
■ RSI 30- Oversold
Important note: If you are a day-trader then use the RSI indicator only in the 5M chart. If the market is ranging and you trade long at RSI=30 and trade short at RSI=70 you can make very good profits. Remember to use the RSI at 5M chart.
How can we calculate RSI?
Nowadays, RSI indicator is embedded to almost every trading platforms that provides technical analysis. RSI may be calculated using the following formula:
RSI = 100 - -------------
1 + RS*
*Where RS for the time period (t) can be calculated if we divide the Average of upward closings during the period (t) to the Average of downward closings during the same period (t)
Using RSI to Confirming the Price Trend
The readings of RSI may be used for confirming new trends. In general an upward trend must have a RSI reading above 50 while an downward trend must have a RSI reading below 50.
■ RSI 50+ Possible Upward Trend Confirmation
■ RSI 50- Possible Downward Trend Confirmation
RSI as an other technical analysis indicator may be adjusted to a preferable time frame. The less periods used the more aggressive RSI indicates an asset while the more periods used the slower the indicator becomes. The standard RSI period value is 14. In Forex trading the best RSI period is 14 or 15. In the following two charts you may compare RSI period=15 and RSI period=50.
Chart: RSI period 15 on EURUSD
Chart: RSI period 50 on EURUSD
What is RSI?