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Trading Articles

RSI: Relative Strength Index

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The Relative Strength Index (RSI) is an extremely popular momentum indicator, perhaps the most well-known one by J. Welles Wilder. RSI provides various signals about trends and trend direction changes. However, most traders use it to spot overbought (the price has become too high and may be headed for a fall) or oversold (the price has become too low and may be headed back up) market conditions.

  • The RSI is calculated in the following way: RSI = 100 - 100 / (1 + RS)
  • Where RS = Average Gain / Average Loss

RSI values range between 0 - 100, and like most oscillators, has overbought and oversold areas. Common usage of the indicator is that RSI values of 70 or above indicates that an instrument is becoming overbought, and therefore may highlight a trend reversal. On the other hand, RSI values at 30 or below commonly indicates an oversold condition that may signal a trend change or corrective price reversal to the upside. These values, however, can be amended by the trader.

According to Wilder the RSI default setup is 14 periods. Traders may change this value depending on how sensitive and fast they want to get the indicator to react to the market.

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RSI is a momentum indicator but also easy to use for determining the trend. When RSI drops below 50 the market is considered bearish, and if it rises above 50 the market is considered bullish. As an oscillator, the RSI has its own movement/trends and can form lows and highs. In this sense, the indicator can be used for finding divergences between the price and the indicator data.

The bearish divergence occurs when the RSI is in the overbought area and prints lower peaks while at the same time in the price chart there is a higher high printing. The bullish divergences occur when the RSI is in the oversold area and prints higher lows chart while at the same time in the price chart there is a lower low printing.

How to add RSI to the Skilling trading platform

Adding RSI to your Skilling trading platform is simple:

  1. Type RSI into the indicator dropdown menu and select RSI.
  2. The screen settings for the RSI are now displayed. You can use the default input data or enter your own.
  3. Click the OK button to add the RSI to your trading platform.

Skilling Summary:

The Relative Strength Index is extremely popular and we would even go so far as to say it is in the top ten of indicators - used by numerous traders of all levels. It is easy to understand as an oscillator...if it is above 70 then the market may be too high, and if it is below 30 the market may be too low. This simplicity is what traders love about it. Of course, you should always tweak and play around with different settings to find one that suits you. But we believe that the RSI is one that you should definitely explore at some point.

Not investment advice. Past Performance is not indicative of future results.

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