What is Relative Strength Index (RSI) ?
The Relative Strength Index (RSI) is one of the commonly used technical indicators in financial market analysis, including forex trading. This indicator measures price momentum and is used to identify whether an asset or currency pair is overbought (overly purchased) or oversold (overly sold). Developed by J. Welles Wilder, the RSI is an oscillator indicator that generates values between 0 and 100.
Here’s how RSI works and how traders use it:
RSI Value Range:
RSI has a value range between 0 to 100. RSI values above 70 are typically considered overbought, indicating that the asset or currency may have been overpurchased and could face potential price declines.
Conversely, RSI values below 30 are considered oversold, indicating that the asset or currency may have been oversold and could face potential price increases.
RSI can also be used to identify divergences between the indicator and the price. Bullish divergence occurs when prices create lower lows while RSI creates higher lows, potentially signaling a price increase.
Bearish divergence occurs when prices create higher highs while RSI creates lower highs, potentially signaling a price decrease.
Crossing the 50 Level:
Crossing from below to above the 50 level by RSI can be considered a signal that buying momentum is strengthening.
Conversely, crossing from above to below the 50 level by RSI can be considered a signal that selling momentum is strengthening.
Confirmation of Other Signals:
RSI is often used in conjunction with other indicators and technical analysis to provide confirmation of trading signals.
It’s important to note that RSI is not the only factor to consider in trading decisions. As part of a more comprehensive technical analysis, traders often combine RSI with other analysis tools to make more informed trading decisions.