What is the RSI indicator?deltafx writer 4 September 2021
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As a forex trader or investor, you should know that using some methods can make it easier for you to achieve your goal. Technical analysis as an analytical method can determine the past and present movements of a market so that you can predict the future of an asset. Therefore, you can increase the chances of making a successful trade by predicting market movements. However, to use these methods, you need tools that usually apply mathematical formulas to draw more accurate points for you. One of these tools is the RSI indicator, which we will describe in detail here.
Nature and history of the RSI indicator
RSI stands for Relative Strength Index. This indicator is known as one of the most popular indicators of technical analysis in financial markets. Welles Wilder developed the RSI Indicator in the 1950s. Wilder is a famous businessman and author who has introduced other well-known indicators to the world of financial markets, such as Parabolic SAR, Average True Range, and Directional Movement Concept (ADX). This indicator falls into the category of “momentum”, and it can measure the speed and change of price movements. In addition, the RSI can be considered an oscillator that moves in the range of 0 to 100.
How does the RSI indicator work?
It may seem that the calculation of the RSI indicator is very complicated and confusing. Here we describe how this indicator works in the simplest possible way. First, you need to calculate the relative strength. You can calculate it by dividing the average profit by the average loss over a period of time. Then add the obtained number (RS) to 1 and divide the result by 100. Finally, the obtained result minus 100 will indicate the RSI amount.
RS = Average Gain / Average Loss
When using technical analysis tools, the most important thing is knowing how to use and interpret them. To get the desired results, you should adjust this type of indicator based on your trading style. The most popular time period among traders is the 14-day period. However, you can increase or decrease these settings. If you already have some information about this indicator, you must have heard the buying and selling saturation levels. 30 and 70 are the sale and buy saturation levels, respectively, which can be changed based on your trading style. This means that these figures can fluctuate between 20 and 80.
On the one hand, we see extreme sales in the market When the RSI falls below 30. In other words, there is a possibility of price increases in the future. On the other hand, when this amount exceeds 70, it indicates excessive purchases, indicating lower prices in the future.
You can even change the data source. It is assumed that the RSI indicator will use closing prices. However, you can calculate RSI based on high, low, open and closed prices. Based on the traders’ experiences, the closing price is usually a better option than others.
Support and resistance levels in the RSI indicator
The downward and upward trend of the market plays a significant role in determining the performance of RSI. In a bullish market, the RSI fluctuates between 40 to 90. The range of 40-50, in this case, acts as support levels. In a bearish market, this indicator fluctuates between 10-60. Resistance levels, in this case, will be between 50-60. In fact, all of these ranges may vary depending on the settings and the strength of the main process.
The RSI indicator is one of the most suitable indicators for technical analysis of market movements. Using this indicator, you can predict the bearish or bullish trends of a market in the near future. True predictions will give your trading positions more credibility. As we advised many times, do not rely on just one method and use this method in combination with others. What distinguishes your trades in the meantime is choosing a broker that can provide appropriate and diverse services in the market. Our offer is always the DeltaFX broker.