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Relative Strength Index – RSI

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The RSI or Relative Strength Index is the most popular technical indicator created by Welles Wilder. His name is not too fortunate for that can induce to the error, as this relative strength is measured not referred to any other value or index, but that is an internal own measurement. It has a linear presentation and reflects the accumulated force of price in the period of calculation that is used. It tries to avoid erratic values that occur in oscillators as the Momentum or the rate of change and to present it in a standardized way, regardless of the stock or index being used.

Why does it serve? Is an indicator normalized that moves on a scale of 0 to 100 with two areas that make oversold levels 0-20 (30) and overbought (70) 80-100. It serves to provide signals to buy / sale and to establish the time of prices when and whether the value pair is overbought or oversold. Let’s analyze in indicator the same formations or figures that in the price chart that usually break and provide signal in advance.

How is it used? The parameter that is used by default is 14 sessions. The shorter the period becomes more sensitive indicator. Its use is most effective when we are in situations of little market trend. Provides buy signals when It happens an upward turn in the indicator within 0-20 oversold area (30). The Sell signals are activated when the indicator turns downward into from the overbought area (70) 80-100. It is used as a leading indicator of extreme market movements, normally occur before the ceilings and floors in the RSI, which in the price chart. It is very effective in the analysis of divergences and helps in the determining of the extreme points of market. If the market is at the start of one trend very strong should distrust signals that occur against the trend.

Tips of Trading It is possible to draw trend lines on the RSI that they evolve of form similar to those who are plotted in the graph of prices. Generally is cut before the trend line drawn on the RSI than on the price chart. It anticipates this way a warning that we can remove doubts as soon as confirmation of the breakdown of the line of the price chart. If the RSI does not provide signs or indications "traditional" value interpret it as an indicator of Momentum; RSI > 50 and raising, positive moment; RSI < 50 and decreasing, negative moment, or more aggressively buying when it crosses to the rise the level of 50 and selling when it crosses to the fall the level of 50.

Example Image RSI in the Metatrader platform

Indicator References: Wilder, Welles, Jr. New Concepts in Technical Trading Systems. Trend Research. McLeansville, NC.

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Erick Gálvez
Author: Erick GálvezWebsite: http://www.asdforex..comEmail: This email address is being protected from spambots. You need JavaScript enabled to view it.
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ASDForex manager and professional trader since 2008. I am also Aleforex.com manager where you can view the services that I give
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