Trying to refine the analysis of the trend and of the Forex market you often come across with many instruments whose reliability is doubtful. Among the indicators most appreciated by all traders we can include the Relative Strength Index, more commonly known only by its acronym RSI. This momentum indicator, developed by J. Welles Wilder, is very often included in software packages devoted to the technique analysis and is very useful to measure the strength or weakness of prices before to arrive at the final turning point.
In order to calculate our indicator we must apply the following formula:
RSI = 100 – [100 / ( 1 + RS ) ]
RS = Average of up closes trades during a selected number of days / average of closing down trades during a selected number of days.
The Relative Strength Index can take values between 0 and 100. The levels of overbought and oversold may vary from market to market and from year to year and are often defined in a range between 30 and 70. However, many traders often change this range to 40-80 in markets upward and 20-60 in downward markets.
This indicator is very useful:
1. It’s used to determine the Bullish and Bearish divergences. When there are divergences between the RSI and the prices we can have strong signals of buying and selling and in particular:
The bullish divergence provide the buying signals and the bearish divergence provides selling signals.
2. The classic graphical methods work better than others with the RSI indicators, often providing helpful information underlying changes in trend.
3. It determines levels where to buy and sell.
Many traders obtain useful information on market trends from this indicator. However this indicator can not be the only technical analysis tool and our advice is to combine it with some other instrument. If you need more information about the Relative Strength Index or other instruments of technical analysis, you can contact our customer service where our technical consultants are available for any help needed.