a part of almost any trading platform certainly has a tool such as RSI-indicator (abbreviation Relative Strenght Index), also known as the relative strength index.Belonging to the class of oscillators, it is able to not only determine the strength of the current trend, but in combination with the price chart in a timely manner to give a signal about its forthcoming change.
Who and when invented the RSI-indicator
inventor of this tool is an American mechanical engineer by Welles Wilder (J. Welles Wilder Jr.), better known for his work in the field of technical analysis.He is also the creator of the well-known among traders as an indicator ADX (Average directional movement index), ATR (Average true range) and the Parabolic SAR.
Introduced in 1978, the "Forex" RSI was originally designed for the analysis of graphs stock exchange and financial indices.In our time, this indicator is widely used in the currency market.
According to Wilder, the construction of the curve rate of price changes is very difficult.Firstly, because of the chaotic traffic, and secondly, because of the lack of a permanent border strip oscillator, allowing to make a comparative analysis.The algorithm description of RSI successfully struggles with these two problems - it not only smoothes the curve, but also has a vertical scale with values from 0 to 100.
RSI = 100 - [100 / (1 + RS)], where the RS - the quotient ofaverage of the closing prices of the upper to the lower average price of closing prices over a given period of time.By default, the time interval is equal to 14. If necessary, it is possible to change, at its discretion, depending on market activity.
If you find the value of the indicator below 30 is considered that it is oversold if the RSI-indicator has a value of more than 70 - in the overbought zone.
Trading Signals RSI
popularity of this indicator is the ease of interpretation of the signals.The intersection of line RSI level 70 from top to bottom is the signal for the opening short position (sell) and bottom-up level 30 - a long (buy).Crossing the 50 level in this case is another sign of validation of the opening position.
In general, RSI-indicator can be used as a filter - t. E. When it is in the overbought zone should refrain from shopping, and when you are in the oversold zone can not be sold.
One of the strongest signals in technical analysis is certainly a divergence - t. E. Contradictions in the indicator (not necessarily RSI) and the price chart.As an indicator of RSI divergence can be successfully used to determine the changing trends and price reversal in the opposite direction.
RSI can also be successfully applied to determine the topping figures (for example, "head and shoulders", triangle, pennant, and so on. F.), And on the chart data figures can not be formed.
Disadvantages indicator RSI
Like any other tool, RSI-indicator is not without drawbacks.Works great on a sideways market, it produces a large number of false signals during the development trend.Because of its signals it can be used only as a guideline and only in combination with other available instruments of technical analysis trader.