Relative Strength Index

Relative Strength Index




The Relative Strength Index (RSI) is a momentum based oscillator used to measure directional price movements.

Relative Strength Index

The RSI, provides a visual way monitor both the current, historical, strength and weakness of a particular security. The strength or weakness is based on closing prices over the duration of a the trading period thus creating a measure of price as well as momentum changes and has also proven to a useful indicator of price movements.

As Relative Strength Index is a momentum based oscillator, this means that as an oscillator the indicator operates within a band of numbers or parameters.

Relative Strength Index

The Relative Strength Index operates using a scale of 0 and 100 and the closer the Relative Strength Index is to 0, the weaker the momentum is for any price movements will be.

An Relative Strength Index closer to 100 the stronger the momentum.

Traders can use a wide variety of numbers of days however 14 days tends to be the most popular period.

Overbought/Oversold

An Index between 30 and 70 can be classed as neutral or no trend.

Relative Strength Index

As a trader you can consider any number above 70 to be overbought and anything below 30 to be undersold.

Divergence

A Divergence occurs when there is a difference between what the price action is indicating and what the Relative Strength Index is indicating.

There are two types of divergences,  these are bullish and bearish .

A Bullish Divergence is when price makes a new low, but the Relative Strength Index makes a high low.

Relative Strength Index

 

A Bearish Divergence is when price makes a new high, but the Relative Strength Index makes a lower high.

Relative Strength Index

These Divergences provides trading opportunities, the Bullish Divergence creates a possible buy trade opportunity and a Bearish Divergence creates a possible sell trade opportunity.

The Relative Strength Index (RSI) is an extremely valuable tool for any trader.  It’s one of the best indicators for a trader and proven to be a core indicator, however as with any indicator, a trader should research and not rely on it as a sole source for any trading decision.  For not only forex, but using the relative strength index indicator to trade binary options can be of great help when used in it’s proper perspective, for not

*Please Note, Binary Options and Forex trading can carry a high level of risk to your capital as you could lose all of your investment. These products may not be suitable for every investor, therefore ensure you understand the risks and seek independent advice. Invest only what you can afford to lose. We are NOT financial advisers and we do NOT offer financial advice.