RSI – The Relative Strength Index
I guess you wonder how this indicator works?
Well in this article you will learn how to read this indicator and add it to your trading strategy, to improve your gains.
Is a common indicator created by J. Welles Wilder, a technical analyst, to help traders assess the strength of the current market.
The RSI is similar to Stochastic in that it detects overbought and oversold market conditions.
It also has a 0 to 100 scale.
Readings of 30 or below typically suggest oversold market conditions and a greater probability of price strengthening (going up).
- An oversold currency pair is viewed by some traders as a sign that the dropping trend is likely to reverse, signalling a buying opportunity.
Overbought conditions and a higher likelihood of market weakness are indicated by readings of 70 or higher (going down).
- An overbought currency pair is viewed by some traders as a sign that the rising trend is about to reverse, suggesting that it’s time to sell.
RSI - GBP/USD 1h
Traders that use the Relative Strength Index (RSI) indicator search for centerline crossovers in addition to the overbought and oversold indicators listed above.
An increasing pattern is indicated by a movement from below the centerline (50) to above it.
As the RSI value crosses over the 50 line on the scale and moves towards the 70 line, it is called an increasing centerline crossover. This means that the market trend is strengthening, and is interpreted as a bullish indicator before the RSI crosses the 70 line.
A dropping pattern is indicated by a shift from above the centerline (50) to below it.
The RSI value crosses below the 50 line on the scale, heading towards the 30 line, resulting in a dropping centerline crossover.
This means that the market trend is slowing, and is interpreted as a bearish indicator before the RSI reaches the 30 line.
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How to use RSI in your trading strategy
The RSI indicator can be used in the same way as the Stochastic indicator.
Depending on whether the market is overbought or oversold, we can use it to predict future tops and bottoms.
Let’s take an example
RSI - Overbought
In the example above you can see how the price of GBP/USD on the 1-hour chart is crossing the RSI 70 limit meaning that the price is overbought.
When the price richer and crosses that level is taking back down by the sellers, and we can see how the price dropped from 1.42500 all the way down to 1.39500.
RSI - Oversold
In the example above you can see how the price of GBP/USD on the 1-hour chart is crossing the RSI 30 limit meaning that the price is oversold.
When the price richer and crosses that level is taking back up by the buyers, and we can see how the price rises from 1.37814 all the way up to 1.4000
In conclusion, the Relative Strength Index (RSI) is a common tool since it can be used to validate pattern formations.
Take a fast look at the RSI to see whether it is above or above 50 if you think a pattern is forming.
Make sure the RSI is above 50 if you’re searching for a potential UPTREND.
Make sure the RSI is below 50 if you’re searching for a potential DOWNTREND.