The Relative Strength Index (RSI) indicator is one of the indicators that get the most attention after the Moving Average in the Forex market. It is known as an indicator that tries to measure the internal strength of the financial asset that is subjected to buy-sell dynamics.
The RSI indicator was introduced by Welles Wilder in 1978 in his book “New Concepts In Technical Systems.” Although its initial goal was to calculate the internal strength of an index or the stock, today the RSI indicator is used to measure the internal strength of all financial assets.
Although levels of 30 and 70 are important numbers in the context of interpreting the indicator, the related indicator is formed by taking the 14-period moving average into account.
The levels of 30 and 70 that take place inside the indicator and the 14-period moving average are the indicator’s standard terms. Yet, they have the flexibility to be changed to be compatible with the asset price.
For instance, a trader who engages in short term buying and selling can change the 14-period moving average to a 9-period moving average in order to make quick moves or can use the 20 and 80 levels instead of the reference levels of 30 and 70 to get the maximum benefit from the return.
One of the most important points to keep in mind with the RSI indicator is that it has the oscillator feature, which contributes to us seeing excessive buy-sell zones and the trend expectation. This means one indicator serves in these two categories (Trend & Oscillator).
In order to view reach Relative Vigor Index indicator in MetaTader platform, follow the ToolBar- Insert- Indicator, then click on Oscillator.
Before adding it to the platform, you can revise or make the 14 figure shared as a standard in line with how many price averages must be taken or the reference levels of 30 and 70 in the “Levels” part which we need to follow the returns of to make it suitable to the financial asset that is to be traded. However, in the training, such change won’t be made and the standard pattern will be followed.
The Positive Or Negative Condition of the RSI Indicator!
While making a buy-sell decision regarding the financial asset, one of the points to pay attention to is the reaction that will occur according to the reference levels to 30 and 70. If the RSI indicator goes above level 70, the OVERBOUGHT view gets attention while if it goes below level 30, the OVERSOLD view gets attention. A financial asset in the overbought or oversold zone might be a signal for a possible return, but you shouldn’t rush for such a return alone.
*** In the case where the RSI indicator returns from the oversold zone and goes above level 30 or makes a return from level 30 or its vicinity, the positive pricing behavior regarding the asset might grow stronger. With this, a possible exit request towards the reference level of 70 might keep the agenda busy.
*** In the case where the RSI indicator returns from the overbought zone and goes below level 70 or makes a return from level 70 or its vicinity, the negative pricing behavior regarding the asset might grow stronger. With this, a possible regression request towards the reference level of 30 might keep the agenda busy.
RSI – Divergence!
The inconsistency between the asset pricing and the Oscillator indicator, which helps us see the overbought and overbought zones might be on the agenda in some periods.
The concept elaborated as divergence is explained as the positive or negative signals according to the reference levels of 30 and 70 not being supported by the asset price.
In this section, which is taken into consideration as Positive Or Negative incompatibility, our main focus point is price asset. The related incompatibility removes the buy-sell signal until the price and the indicator are in harmony.
In the Oscillator indicators, which help us see the overbought and oversold zones, the incompatibility times will affect trade performance negatively. Thus, no indicator should be used alone.
*** RSI indicator is a crucial indicator for traders. While the related indicator needs to be used in line with the theoretical approach, probable revisions of asset pricing are also essential for minimizing the current risk. Moreover, because it has a slow working mechanism (as the trend expectation is also supported), signals arriving late might cause delays in making investment decisions. Thus, specifically, traders who realize intra-power trades must not forget that the RSI indicator should be evaluated alongside other auxiliary tools.