RSI or Relative Strength Index is the most commonly used and popular technical indicator that provides information about strength of the Forex market on the basis of past data sets. Here in this article we will discuss about the basic concepts of RSI, its usage and signals in forex trading.
Concept of RSI in Forex trading:
Relative strength index is mostly used by Forex traders to ascertain the changes in price levels over a specific period of time. Here if traders are analyzing strength of the market over 5 periods, then this indicator would measure the strength or weakness of the movement of the candle over past 4 periods. It helps traders in analyzing the weak and strong nature of price movements in the market, by reading the value between one (1) and hundred (100). Markets experts believe that if RSI is providing the reading, which is below the level of 30 then, it is assumed that an oversold position is expected in the market.
Usage of RSI:
RSI is an oscillator that depicts overbought and oversold positions to traders in the active market session. Besides this it also confirms movement in forex prices and warns traders about future reversals through divergence. It generates buy and sell signals by measuring current rate strength, and guide traders to take decisions related to entry and exit from Forex market.
Understanding the formulae:
The period of RSI is decided upon by the trader as is wholly based upon the time series data, about a particular currency pair. After this, the closing price of current session is compared with the closing price of yesterday’s session. Analyze and add all the movements that are in upwards and downward direction (in closing price) for the RSI period. After this step, now calculate the exponential MA of various forex price movements. Now calculate the RS or Relative strength and finally the RSI. The formula that is used for calculating RSI would be 100-100/ (1+RS).
RSI Signals in Forex:
During technical analysis RSI gives information about overbought, oversold, failure swings and divergence levels. It is suggested that traders must set the overbought level at seventy (70), while the oversold level should be adjusted at thirty (30). Now, when the RSI depicts a fall below level 30, and then again risk above this level, trader must consider it as long signal. On the other hand if RSI shows a rising pattern above 70 and again falls at the same level, then such a signal should be considered as short. Traders are advised to follow uptrend in the forex market for taking long position, whereas, he must observe the downward trend for going short. At the long position the RSI falls even below levels of 30, and in short trend it rises above the level of 60. Finally Forex trader must book his profits on the pattern of divergence, after confirmation from trend analysis indicator.
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