RSI Relative Strength Index is one of the most used oscillators in the Forex market

RSI Instrument in tehnical analysis

In this article I will show one of the most used oscillators in the Forex market, the Relative Strength Index (RSI). This tool of technical analysis is led by one of their pioneers, Welles Wilder, who has set up an indicator to measure the rate and magnitude of the price change on the instrument. Relative Strength Index (RSI) has become very popular, thanks to its ability to predict bounced and redistributed values, to show divergence or to help filter out market entry.

How does Relative Strength Index work?

Every time we start using a new indicator, it’s good to get acquainted with it, not only visually but also in terms of calculation. What would be an indicator we would not know what it measures and shows.

Relative Strength Index (RSI) uses a simple formula

RSI = 100 (100/1 + RS), RS = Average Profit to Average Loss. RSI is most commonly used with the period of fourteen, ie. that the average profit is calculated as the total profit to fourteen (period), of course, the average loss is, calculated.

How to use Relative Strength Index?

Purchased and redistributed zones Relative Strength Index is a classic oscillator, as such, it is able to show market areas where there is an increased probability of correction. For bundled zones, this is between 70-100 and 0 – 30 for redistributed zones. Beware, that the position of the indicator is not a signal for market entry. This is often the case for beginner traders. It is always necessary to monitor the market from multiple perspectives. One of the disadvantages of oscillators is that they can last very long in extreme areas and can grow further in the extreme direction. Ideally, use extreme values to confirm another signal.

Divergence

We have dealt with the topic of divergences in this article. However, it is worthwhile recalling that RSI is a good tool for finding business opportunities through divergent moves.

Trend identification

Oscillators can also serve to identify a trend or to confirm entry to a store. If you decide to use RSI, then use 50 to distinguish bull and bear sentiment to identify the trend. Most traders use Relative Strength Index so that if the opportunity arises for a long position, they will see if the Relative Strength Index has crossed level 50 from bottom to bottom, vice versa when looking for a short position. If you decide to use RSI as an indicator confirming trend, beware of possible false signals.