RSI: Relative Strength Index

The Relative Strength Index, or RSI, is one of the most popular technical indicators among traders. It was developed by J. Welles Wilder in 1978 to measure the speed and change of price movements. This indicator also helps determine the overbought/oversold status of the market to buy low and sell high.

How to implement RSI

To add the RSI to the chart, click on “Indicators” – and type RSI in the search bar and you will see the Relative Strength Index option

By default, MetaTrader will offer you to have “14” as the number of periods. You can change this parameter if you wish. Short-term traders typically use the 9-period RSI, while those who prefer longer-term trading select the 25-period RSI. In general, the shorter the period, the more fluctuations the indicator will make.

How to interpret the Relative Strength Index

The indicator readings fluctuate between 0 and 100. You can also add a midline at 50. If the RSI is above this point, the momentum will be considered bullish and it will make more sense to look for buying opportunities. When the RSI falls below 50, it is a sign of a new bearish market trend, so consider opening short trades.

The market is overbought or oversold

Like other oscillators, the RSI helps determine when the asset is overbought or oversold. For the RSI, you should look at the levels of 70 and 30. If the RSI exceeds the limit of 70, it means that the market is overbought and could correct lower. If the RSI falls below the 30 line – it means that the asset is oversold and could return to higher levels.

Note, however, that this approach is not suitable for trading strong trends when the RSI may remain overbought or oversold for long periods of time. If you have evidence that there is a strong trend in the market, consider selling when the RSI is oversold in a downtrend and buying when the RSI is overbought in an uptrend.

In general, the quality of RSI signals increases by following only signals that are in the direction of the trend when the indicator leaves critical levels. For example, you can buy during an uptrend when the RSI rises above the 30 level.

The market reversal

Additionally, a divergence between the RSI and the price could be a warning about a market reversal. When the new price high is not confirmed by the new high on the RSI, it is a bearish divergence, which is a negative signal. When the price forms a lower low but the RSI low is higher than the previous one, it is a divergence in favor of the bulls.

The RSI is often used in combination with another oscillator, the MACD. While the RSI measures price movement relative to recent price highs and lows, the MACD measures the relationship between two Exponential Moving Averages. Together, the RSI and MACD represent a powerful combo.

Conclusion.

A competent trader must know what the RSI is and how to use it. Make sure your analysis is not based solely on the RSI, but encompasses the study of price action as well as other technical indicators. Remember that Relative Strength Index signals are the most reliable when they correspond to a long-term trend.