RSI indicator of the Relative Strength Index on the Forex market

As part of almost any trading platform , there is necessarily a tool such as the RSI indicator (abbreviation Relative Strenght Index), also called the Index of relative strength. Relating to the class of oscillators, it is able not only to determine the strength of the current trend, but also in conjunction with the price schedule in a timely manner to give a signal about its upcoming shift.

Who and when came up with the RSI indicator

The inventor of this tool is the American mechanical engineer Wells Wilder (J. Welles Wilder Jr.), better known for his work in the field of technical analysis. He is also the creator of such indicators known among traders as ADX (Average directional movement index), ATR (Average true range) and Parabolic SAR.

Appearing in 1978, the indicator "Forex" RSI was originally created for the analysis of stock market charts and financial indices. In our time, this indicator is widely used in the foreign exchange market.

Description of the RSI indicator

According to Wilder, the construction of the curve of the rate of change in prices is very difficult. Firstly, because of the chaotic motion, and secondly, because of the lack of a constant boundary of the oscillator band, which makes it possible to make a comparative analysis. The algorithm for describing the indicator RSI successfully fights these two problems - it not only smoothes the curve, but also has a vertical scale with values from 0 to 100.

RSI = 100 - [100 / (1 + RS)], where RS is the quotient of the average of the upper closing prices to the average price of the lower closing prices for a given period of time. By default, the value of the time interval is 14. If necessary, you can change it at your discretion depending on the activity of the market.

If the indicator is below the value of 30, it is considered that it is in the oversold zone if the RSI indicator has a value of more than 70 - in the overbought zone.

Trading signals RSI

The popularity of this indicator is the simplicity of the interpretation of its signals. Crossing the line RSI level 70 in the direction from top to bottom is a signal to open a short position (for sale), and a bottom-up level of 30 - a long (to buy). Crossing level 50 in this case is another sign of confirming the correctness of the opening position.

In general, the RSI indicator can be used as a filter - that is, when it is in the overbought zone, you should refrain from buying, and if you are in the oversold zone, you can not sell.

One of the strongest signals during the technical analysis is, of course, a divergence - that is, a contradiction in the indications of the indicator (not necessarily RSI) and the price chart. As an indicator of divergence, RSI can be successfully used to determine the trend reversal and the price reversal in the opposite direction.

RSI can also be successfully used to determine reversal figures (for example, "head and shoulders", triangle, pendant, etc.), and on the price chart, the figure data may not be formed.

Disadvantages of the RSI indicator

Like any other tool, the RSI indicator is not devoid of flaws. Perfectly working on the side market, it produces a large number of erroneous signals when the trend develops. Therefore, its signals can be used only as recommendations and only in conjunction with other tools available at the disposal of the trader for technical analysis.