The Relative Strength Index (RSI) is one of the most popular Technical Indicators in oscillator charting methods. RSI is normally used to compare the currency strength and to predict currency price movements.
The RSI, developed by J. Wilder, contrasts the downtrend and uptrend prices over a period of time. The RSI gives more emphasis to the latest data and provides a better indication than what is provided by other oscillators. As the RSI is less sensitive to sharp price fluctuations, it helps to sift unwanted “noise” in the Forex market.
Mathematics calculations behind RSI charting:
RSI= 100 - 100/(1+RS) where RS = sum of positive closing prices divide by sum of negative closing prices. RSI helps traders to predict price movements and to identify market turning points. A rise in RSI will normally be followed by a rise in the currency price; and vise versa, a downtrend RSI indicates that the currency price is more likely dropping.
In addition to being a momentum indicator, Forex traders also use the RSI as a volume indicator. Because of the nature of the Forex market as an ”Over the Counter” market (OTC), real time volume reporting is not possible. The RSI has a scale from 0 to 100. Any reading that is below 30 denotes an oversold market condition while any reading above 70 denotes an overbought market condition.
The chart below indicates a RSI reading of below 30:
This chart shows an RSI reading of above 70 meaning that the currency pair is getting overbought:
Five Different Ways of Using the RSI:
1. To indicate overbought or oversold market conditions. These conditions are indicated by reading at 30 or 70.
2. Divergences – if the price of a currency reaches a new high and the RSI doesn’t show the same situation, this normally indicates that a price reversal is imminent.
3. Support & Resistance - The RSI can also be used to indicate the support and resistance levels of a currency trend.
4. To indicate chart formations more clearly. Chart patterns like “double tops” or “Head & Shoulder” can be seen more clearly with the RSI than on the price chart itself.
5. Failure Swings – if the RSI breaches its previous peak or low, this may mean that a price breach may be on the way.
The RSI, developed by J. Wilder, contrasts the downtrend and uptrend prices over a period of time. The RSI gives more emphasis to the latest data and provides a better indication than what is provided by other oscillators. As the RSI is less sensitive to sharp price fluctuations, it helps to sift unwanted “noise” in the Forex market.
Mathematics calculations behind RSI charting:
RSI= 100 - 100/(1+RS) where RS = sum of positive closing prices divide by sum of negative closing prices. RSI helps traders to predict price movements and to identify market turning points. A rise in RSI will normally be followed by a rise in the currency price; and vise versa, a downtrend RSI indicates that the currency price is more likely dropping.
In addition to being a momentum indicator, Forex traders also use the RSI as a volume indicator. Because of the nature of the Forex market as an ”Over the Counter” market (OTC), real time volume reporting is not possible. The RSI has a scale from 0 to 100. Any reading that is below 30 denotes an oversold market condition while any reading above 70 denotes an overbought market condition.
The chart below indicates a RSI reading of below 30:
This chart shows an RSI reading of above 70 meaning that the currency pair is getting overbought:
Five Different Ways of Using the RSI:
1. To indicate overbought or oversold market conditions. These conditions are indicated by reading at 30 or 70.
2. Divergences – if the price of a currency reaches a new high and the RSI doesn’t show the same situation, this normally indicates that a price reversal is imminent.
3. Support & Resistance - The RSI can also be used to indicate the support and resistance levels of a currency trend.
4. To indicate chart formations more clearly. Chart patterns like “double tops” or “Head & Shoulder” can be seen more clearly with the RSI than on the price chart itself.
5. Failure Swings – if the RSI breaches its previous peak or low, this may mean that a price breach may be on the way.
