Relative Strength Indicator - The RSI Indicator

Developed by Welles Wilder, the Relative Strength Indicator (RSI) is one of the most popular momentum indicators in Forex technical tools used for business and marketing.With the relative strength indicator, you can identify new trends in the stock market. This is done as the relative strength indicator displays to you the over brought and over sold conditions along with the divergences in the trends. It further provides you the crossovers which mainly help you identify any threatening or promising changes in the market trends.
Typically, the calculations are done over a time period of 14. It is important to note that the shorter time period would be, the more fluctuations would you see. Now, let’s briefly explain the terms used above to give you a clearer understanding of how RSI works and how you can use it.
RSI Divergence
If the trend of the indicator has a direction opposite to the trend followed by the price changes, an RSI divergence is said to have occurred. A trough that goes lower than 30 is an indication of a positive divergence. For peak as high as 70 or more, the divergence being represented is negative.
RSI Crossover
This defines whether we are at a bull position or a bear one. The baseline is at 50. Now, if the line is rising it indicates that we are going from a bear to a bull. If the line is declining it means we are moving froma bull to a bear market.
Overbought/Oversold
The relative strength index gives a clear identification if there is a n over bought or oversold conditions in the pattern of the market. If the value is greater than 70, an overbought condition is identified. This is an indication that you should turn toward downside protection.
On the other hand, if the value is less than 70, the indication is that you should sell. If the value drops down further and reaches 30, take it as a warning. This represents an oversold condition. At this point you should buy the most suitable set ups. The area close to 30 is a buy signal so be prepared and act fast if that happens.
As you must have reckoned, the relative strength index is simple to read and interpret, and is a great help for you to judge the position of the trends in the market and the position of your business.


Read more details about rsi indicator and rsi divergence.