The Relative Strength Index is one of the famous forex indicators from the oscillator class. and you can download as much as you can forex indicators from forexprofitway The RSI indicator defines the overbought and oversold condition of a currency pair. J. Welles Wilder Jr. Introduce the trading indicator to the world in a seminar in 1978.
RSI is a forex indicator that moves from 0 to 100 levels. The basic trading idea of this forex indicator is to sell when a currency pair moves above the 70 levels and buy when the instrument price moves below the 30 levels. Furthermore, there are many trading strategies based on the relative strength index like divergence, trend continuation, and the price momentum calculation. However, the formula of the RSI is very important that every trader should know.
The calculation of the Relative Strength Index has two parts. In the first part, the average gain or loss is calculated in a specific number of periods. Generally, in the standard indicator, 14 periods are used to calculate the first value. It calculates the average percentage of gain and loss in the last 14 number of timeframe following the formula-
Based on the calculation of the first part for 14 periods, the final value of RSI is calculated following the calculating method-
Generally, RSI is overbought above the 70 levels and oversold below the 30 levels. However, it depends on the nature of the trading asset. If a currency pair repeatedly test the 70 levels and does not provide a reliable signal, you can consider 80 as the overbought level. On the other hand, identifying the market trend is also important. When a currency pair moves with a strong uptrend, it may violate the oversold zone until it finds an appropriate resistance level.
Moreover, these levels are also helpful in identifying the take profit level. You can enter a buy trade based on a bearish reversal at RSI 30 level and hold it until it reaches the overbought zone. If the price starts to stall at 70 levels, you can book some profit or close your trade with gains.
Besides the overbought and oversold zone, this forex indicator also provides reliable price patterns and support and resistance zones. If the price moves within a strong uptrend, the 40-50 RSI zone would provide a potential support zone. Similarly, in a downward market, the 50-60 zone works as a potential resistance zone at the bullish correction.
Usually, RSI follows the market by creating higher highs and lower lows. If the RSI follows the trend by creating a new higher high, the trend would be stronger. On the other hand, any discrepancy between the RSI and the price might create a potential reversal trading strategy.
When a price creates a new higher or lower lows, but RSI does not follow, it creates a divergence. Divergence is a reliable reversal trading strategy where you can predict the potential market reversal zone.