What is a RSI Indicator? How to identify a good RSI indicator?

Out of the many existing trading indicators, RSI indicators has be major useful indicators for many traders but many new traders are unable to utilize it properly. In this article, we will check in details on how to make use of this useful tool called RSI Indicator.

The Relative Strength Index or RSI in short is a momentum oscillator that measures the speed and change of price movements, it was developed back in 1978 by J. Welles Wilder. The RSI oscillates between zero and 100. Earlier, when the is goes  above 70, RSI is considered overbought and when it is below 30 it is considered oversold. Using RSI, Signals can be generated by looking for divergences and failure swings. RSI can also be used to identify the general trend. Now, this indicator is one of the most popular trading indicators among traders that has been featured in a number of articles. The RSI uses the two zones namely “oversold” and “overbought” zone, the traders will use this RSI line that oscillates between these two zones to create buy and sell opportunities. For RSI to properly function, it generally uses a 14-period average. The basic formula is mentioned below:

Average = Average Gain / Average Loss.

According to many traders, RSI is one of the most popular trading indicators. You need to make a buy trade at the oversold region and similarly, make a sell trade at the overbought region. RSI indicator is considered highly sensitive to market fluctuations and may face RSI divergence multiple times If you trade in the short time frame chart, which many experts do not recommend.

Besides reading overbought and oversold zone, there are certain special features in RSI, which is that the relative strength index and the closing chart almost go hand in hand. Sometimes it becomes difficult to differentiate which one is RSI and which one is the closing chart. Besides reading overbought and oversold zone, there are certain special features in RSI, which is that the relative strength index and the closing chart almost go hand in hand. Sometimes it becomes difficult to differentiate which one is RSI and which one is the closing chart. For every platform, the settings may be different. However, most platforms should have an RSI indicator. Once you find the RSI indicator in your platform’s indicator index, you can edit the settings according to whichever relative strength index trading strategy you want to employ. Again, the RSI is not just about buy and sell signals. The indicator is about showing “strength,” particularly as a measure of the strength of the trend

RSI is considered overbought when above 70 and oversold when below 30. These traditional levels can also be adjusted if necessary to better fit the security. In short, if a security is repeatedly reaching the overbought level of 70 you may want to adjust this level to 80. During strong trends, the RSI may remain in overbought or oversold for extended periods.RSI also often forms patterns that may not show on the underlying chart, such as double tops and bottoms and trend lines. Also, look for support or resistance on the RSI.

In an uptrend or rising market, RSI tends to remain in the range of 40 to 90 with the 40-50 zone. During a downtrend, the RSI tends to stay between the 10 to 60 range. These ranges will vary depending on the RSI settings and the strength of the security’s or market’s underlying trend.

If underlying prices make a new high or low that isn't confirmed by the RSI, this divergence can signal a price reversal. If the RSI makes a lower high and then follows with a downside move below a previous low, a Top Swing Failure has occurred. If the RSI makes a higher low and then follows with an upside move above a previous high, a Bottom Swing Failure has occurred.

Just like other indicators, the signal quality will also depend upon the characteristics of the underlying security. Relative strength index should also be used in conjunction with other indicators and technical parameters to generate better and more confirmed trading signals. If you are new to trading, combining the relative strength index with another indicator like volume or moving averages is likely a great start. Pairing with the indicator will give you a set value with you can make a decision. It also eliminates a lot of doubt area which is really helpful for new traders. Once you progress in your trading career and make better gains, you might want to look to methods using price action that are more subjective. At this point, you may be able to apply techniques specific to the security you are trading, which could increase your winning percentages over time. But again, this level of trading takes a ton of practice over an extended period.

Now with Mitrade, you can create a demo account which will provide you up to 50,000 USD for practice. To know more about Mitrade demo account, you can click on the following link:

What is Forex Trading Demo account? Why is it important in Forex Trading?