Forex School

Lesson: 20 – Relative Strength Index

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Relative Strength Index

The Relative Strength Index, RSI commonly known in the jargon as the stochastic is an oscillator. Probably still one of the most widely used indicators, it was created in 1978 by J. Welles Wilder. The RSI is an oscillator

This oscillator bounded between 0 and 100, measures the market dynamics by comparing the increases and decreases included in the calculation period. However, its general interpretation does not really diverges from that there will over most of the oscillators. In other words, we find the same concepts of overbought and oversold (as seen previously on stochastic).

First we will look somewhat Method and then we will see the practical applications of RSI in trading. Note that this indicator is very popular and will be available in all the best forex broker .

rSI formula

Here, H represents the average increases over the period and the B average declines over the period.  As you see the formula is relatively simple, contrary to the beliefs of the neophytes, indicators are usually quite simply calculated 😉 We notice very quickly why this indicator is bounded by 0 and 100.

On one hand, the second member will necessarily be less than 100 (for H and B are positive), the RSI will be necessarily positive. On the other hand, the second member always greater than 0 will prevent RSI exceed 100.That’s it for breakfast theoretical aside 😉

The choice of the period RSI is very subjective, however the period 14 is the one advocated by J. Welles Wilder in his book. Nonetheless 9 and 5 periods are also considered interesting by the same author.

Example of RSI oscillator

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As always with the oscillators, one can easily notice two particular areas clearly identified. This is overbought (above 70) and oversold (below 30), once again repeat, when the RSI comes into oversold territory it is best to open long positions and conversely in overbought area .

This is not generalizable to all market conditions, this technique will be used in a market that ranks or only in the direction of the trend (we can reduce the time to have a greater abundance of signals).Let’s look at a small example to clarify all this 😉

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Here, we took the same position as before, however, we have evolved the period to 9 for clearer signals. And as you can see, in a market that ranks as here, the results are really good. In this configuration each position is crowned by success.Now see how to use the zones of overbought and oversold trend.

Surachats areas and gusts marked by RSI

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In this case, we identify quite clearly a rising trend in basic movement punctuated by downward corrections. It is therefore desirable to avoid short positions.The goal in this kind of figure, is to find the points where classes are likely to start rising. These are points of IHR came into oversold territory.

Here our RSI is calculated on the basis of 9 periods. In this type of strategy in forex it is best to reduce the period RSI to see 9 5 depending on the strength of the trend. This to show entries in box obvious oversold (or overbought in a downtrend).We have seen how to use the excess zones wisely, we turn now to the IHR as a trend indicator. For this important information: The position on 50.

Using the RSI with a market trend Let’s just see this through two examples of possible configurations.We can define a bullish dice when it evolves beyond 50. The RSI is fast enough (and sometimes somewhat chaotic), it is advisable for this kind of method of keeping a period 14

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Similarly, here the 14 RSI has crossed down the 50 level indicating that the course would produce a downward movement, and that proved correct.

How to use the RSI in Forex
There are host of oscillators, however, with the stochastic, RSI remains the most used of them. There will be an integral part of the arsenal of seasoned trader, for finding the input signals, it can also warn us of a potential rollover and we indicate points of relevant outputs. A great place to make money in forex .

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Saimon Akash

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