Use of RSI

   as Relative Strength Index  

Introduction

     RSI is created by J. Wilder in 1978. Similar to Stochastic, RSI is a momentum indicator aswell measuring the market momentum on a scale from 0 to 100. Usually areas 30 and 70 are defined as strong levels where signals are generated. Being next to 30 means an oversold situation, being next to 70 means an overbought situation. RSI generating valuable signals when the market is in a sideways (range) trend. Standard period of the indicator is 14 (14-day).

     We can also define areas 20 and 80, 10 and 90. With these ratios we can filter out more false signals.

 

Signals

 

1) RSI comeback from an oversold / overbought area
When RSI got in an oversold area and then comeback, above 30 we are talking about a BUY (bullish) signal.
Vica versa for sell signals.

 

2) When RSI is in consolidation
There comes a time when RSI can't get through either the oversold either the overbought area. In this case RSI 50 acting as a dynamic support/resistance. An unusual signal, but used widely.

 

 

3) Az RSI breaks through 50
RSI could be used as a trendfollower indicator aswell. In this case a clear trend should be seen on chart when it got through 50. If RSI crosses 50 from above, its a sell signal, vica versa for long signal. This trading style is similar what I wrote at point ONE, with a difference that in this case we are concenrating on the trend. Reduced false signals and better performance.

 

 

4) Technical Analysis on RSI
RSI is really good with filtering-out noise so Technical Analysis often used on the histogram. We can draw trendlines, supports and resistances, recognising patterns aswell. With this technique we can filter-out more false signals and receive better signals combined with.

 

 

Divergence

     Like most indicators RSI have strong divergence signals aswell. Watching divergence signals is popular on H1 and manage on M15.

 

 

 

(Written by Stockwalker 28th of June)

 

 


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