Contents
What is RSI?
The RSI is a Relative Strength Index that indicates how strong is the trend and helps to predict the possible reversal of the trend. It is estimated as follows: the price growth during a given time is summed up and divided by the total of price decreases over the same period.
The results are displayed on the graph from 0 to 100 percent. If all the candles during a certain time are green, the value of the RSI will be 100 percent. In the opposite situation, when all the candles are red, the value will be 0 percent.
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The RSI period and oversold/overbought values
The period of the indicator is simply the number of candles taken into account for the calculation of the percentage. The default period of the RSI is set for 14. You can change it by clicking a pen icon in the indicator window. Furthermore, you can adjust the color and thickness of the RSI line.
The overbought and oversold areas are set for 70 and 30 percent. The precision of trading signals improves when the indicator is in the overbought or oversold areas that is when the percentage exceeds 70 or 30.
Pros and Cons
Here are the advantages and disadvantages of using the Relative Strength Index (RSI) indicator:
- 👍 Pros:
- Provides insights into the strength of a trend
- Helps identify potential trend reversals
- Easy to understand and interpret
- 👎 Cons:
- May generate false signals in choppy or ranging markets
- Should not be relied upon as the sole basis for trading decisions
- Requires additional analysis and confirmation from other indicators or tools
How to use the RSI
Your main task is to observe the RSI line. When it crosses 70 percent it enters the overbought zone. The prices were rising rapidly and they will soon fall. When the indicator intersects the lower band of 30 percent, it gets into the oversold area. The prices were falling too much and now they are about to rise.
I recommend that you familiarize yourself with the article about divergences on the RSI and about combining RSI with Bollinger Bands. You can find it to be an interesting way to use the RSI indicator at Olymp Trade.
Share your thoughts on the Relative Strength Index with us. Use the comments section below.
Good luck!
Q&A on the Relative Strength Index (RSI)
- Q: What is the RSI and how does it work?
- A: The RSI is a Relative Strength Index that measures the strength of a trend and predicts potential trend reversals by comparing price increases and decreases over a specified period.
- Q: What are the default settings for the RSI?
- A: The default period for the RSI is 14, and the overbought and oversold levels are set at 70 and 30, respectively.
- Q: How can I use the RSI indicator in my trading strategy?
- A: You can use the RSI to identify overbought and oversold conditions, potential trend reversals, and as a confirmation tool alongside other indicators or tools.
- Q: Are there any limitations or risks associated with using the RSI?
- A: While the RSI can be a useful tool, it may generate false signals in choppy markets and should not be relied upon as the sole basis for trading decisions. It’s important to conduct thorough analysis and consider other factors before making trading choices.