Forex Trading

RSI Indicator Explained: Calculation and Definition

Since the 6th period is a down period, nothing would be added to the up periods calculation. You will learn more about how the RSI settings affect the characteristics of a RSI trading strategy in parts 2 and 3 of this series. Your RSI period setting will depend on your goals and your trading strategy. Many websites refer to the default RSI setting as 14 days, but that’s only if you are trading on the daily chart. The RSI look back can also be measured in weeks, hours or minutes.

what is the rsi indicator

RSI near the horizontal line having the value 30 is a bullish signal. In other words, it indicates that the accumulation of sellers in the stock has reached a saturation level, and a trend reversal is on the cards. Shorter Moving Average is Above or Below Longer Moving Average- Here we use two moving averages; one longer and one shorter.

Let’s take an example to understand the concept better. + The RSI is best used when combined with signals from candlesticks and candlestick patterns. This method purely uses the RSI indicator because you only need to observe it for opening orders. You can use the Phemex BTC/USDT pairs on TradingView to strategize your trade on the site before you open an actual trade on Phemex. If you want to set up alerts when the Bitcoin RSI indicator makes a move, the most widely-used site is TradingView.

Use RSI In a Bearish Trend & a Bullish Trend

Welles Wilder and published in a 1978 book, New Concepts in Technical Trading Systems, and in Commodities difference between medicare and medicaid magazine in the June 1978 issue. It has become one of the most popular oscillator indices.

what is the rsi indicator

If the RSI indicator is below 30, the security is considered to be oversold. Using the RSI in this particular way is very similar to drawing trend lines on a price chart. The author has done a Bachelors in Banking and Insurance . Her goal is to help readers make better investment decisions.

What does the RSI tell you?

If the indicator forms a higher high, and the price makes a lower high, the market will continue declining. The indicator line draws the first top in the RSI overbought zone, turns down, and breaks out level 70. Next, it again tries to test the top, but it makes a lower high which is not explicit.

  • Since the 6th period is a down period, nothing would be added to the up periods calculation.
  • MACD is useful for a highly volatile market, and RSI tends to top out at the level and bottom out at the level.
  • The MACD, like RSI, is a momentum-following indicator that displays the balance between the moving averages of Bitcoin or another crypto.
  • One way of addressing this issue could be to lower the sell threshold.
  • The remaining seven days all closed lower with an average loss of −0.8%.
  • He uses RSI divergences to identify important reversals on various timeframes.

These tools can be even more effective when used with chart patterns, Japanese candlesticks, and volume for further confirmation. It means that the indicator shows the strength of the market price movement relative to the last 50 candlesticks, whose closing prices are used in the formula. The relative strength index calculation formula takes into account the price change of the last 50 bars, and 50 is the indicator period. The longer is the period, the smoother and slower the index reacts to price changes, and the fewer entry signals it sends. If you reduce the period, the indicator’s sensitivity increases, but the number of false signals also increases. You should choose such a period, according to the historical data, at which the ratio of the frequency of the signals and their effectiveness would be optimal.

Strategy 1. Trade Forex following RSI overbought – oversold signals

If a 10 day lookback period consistently appears to be better than the default 14-day, there is no need to stick with the latter. A bullish divergence occurs in a bearish trend when price action makes a lower low, yet the RSI indicator makes a higher low. Based on the tool’s design, readings above 70 indicate overbought conditions during an upward price movement and suggest a pullback and possible reversal is coming. In contrast, readings below 30 indicate oversold conditions during a downward trend, and a rally over reversal could materialize.

Highs/Lows on the price and indicator charts should visually coincide. The first turned out to be weak, although ultimately, the pullback would not have triggered the stop, and the trade would have yielded a profit. This way, you will extend the period of the chart display without changing the time frame. You can’t set the levels with the accuracy of a few decimals. You can choose the thickness and the color of the lines, levels, and the fill color between the levels. The levels value the value of the levels with precision to the fourth decimal place.

what is the rsi indicator

The indicator may also remain in oversold territory for a long time when the stock is in a downtrend. This can be confusing for new analysts, but learning to use the indicator within the context of the prevailing trend will clarify these issues. The relative strength index is a momentum indicator used in technical analysis. RSI measures the speed and magnitude of a security’s recent price changes to evaluate overvalued or undervalued conditions in the price of that security. As previously mentioned, RSI is a momentum based oscillator. What this means is that as an oscillator, this indicator operates within a band or a set range of numbers or parameters.

The longer the increasing candlesticks are, the closer is the oscillator to level 100. It is an oscillator that indicates the trend strength and the chance of the trend reversal. RSI measures the speed and change in the price movement.

What Is a Good RSI Indicator?

Can toggle the visibility of the Upper Bollinger Band well as the visibility of a price line showing its value. Can toggle the visibility of the RSI-based MA as well as the visibility of a price line showing the actual current MA value. Can toggle the visibility of the RSI as well as the visibility of a price line showing the actual current price of the RSI. Can also select the RSI’s color, line thickness and line style. Determines the type of Moving Average that is applied to the RSI calculation.

Relative Strength Index (RSI) Versus Other Technical Indicators

Please ensure you carefully read the risk Disclosure Document as prescribed by SEBI. Please ensure you carefully read the risk Disclosure Document as prescribed by SEBI/FMC. Wilder recommended to go long once the RSI is below 30. Short sellers can consider booking profits at this point.

The RSI indicator like many other technical indicators can be customized further to work better with cryptocurrencies. For example, more advanced trading techniques recommend changing the boundaries to generate trade signals at 80 and 20, for greater accuracy and less risk. The result is displayed as a line chart within a bounded indicator with a gauge between 0 to 100. The reversal in the overbought market zone and crossing the level from above is a signal to enter a short position.

All signals indicate that you can enter a trade at the moment of the trend reversal. When the RSI crosses the signal level, you enter trades when the price changes in the same direction as the indicator. If the indicator goes against the trend, ignore the signal. The indicator should break through the strong level when it goes outside the overbought or oversold levels. It is the number of candlesticks, which the RSI momentum oscillator analyzes to indicate the average value. It means that the market price change for the last 14 is considered.

Notes when using the RSI indicator in Forex trading

What it means is that you should take a breath and observe how the stock behaves. Unfortunately, there are times where the price action itself changes from one of impulse to a slow grind. I think it’s important to highlight where indicators can fail you as a trader and the RSI is no different.