Forex Trading Education – The Relative Strength Index (RSI)

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The Relative Strength Index (RSI) is a momentum oscillator that measures the speed of price changes. It is used to evaluate oversold and overbought conditions, and its value could range from 0 to 100. Seventy or above indicates that the asset is being overbought or overvalued and might face a reversal. Thirty or below means it is oversold or undervalued and it might stage an upward correction.

Relative Strength Index

The RSI indicator is often used to detect divergences that could trigger a price reversal and could be used as a signal (an opportunity) to open a position. A divergence between the price and the indicator takes place when the slope of the RSI line goes in the opposite direction of the price. For example, when the price keeps making higher highs and the RSI does not. The divergence suggests that the main trend is losing power.

To improve the analysis, it could be used in combination with other indicators like moving averages. The RSI line can be plotted below the price chart, as opposed to other indicators that are plotted in the same chart. Technical analysts also look into the RSI chart for patterns, like trendlines, support or resistance areas. These patterns might not be reflected in the underlying asset.

Usually, the default setting for the RSI uses 14 periods for its calculation (days in the daily chart). If you want the indicator to increase price sensitivity, you need to lower the number of periods or add more for a smoother chart.

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