Do you know RSI? It is, along with moving averages, MACD and Bollinger Bands, one of the best technical analysis indicators. Today you will learn about the Relative Strength Index formula along with possible applications of this great indicator.
Contents
What Does the Relative Strength Index (RSI) Measure?
The RSI indicator defines trend strength and probability of trend reversal.
How is the relative strength line calculated?
It is calculated in the following way: the sum of price growth for a given period is divided by the sum of the price decrease. The calculation of RSI values, fortunately, belongs to the platform. It is not a difficult process, but it does require several steps of calculation. In the end, they come down to a simple Relative Strength Index formula:
RSI = 100 – { 100 / [ 1 + ( Average Gain / Average Loss ) ] }
The indicator puts the resulting data on a scale from zero percent to 100 percent. Thus if all candlesticks on the given period are green then the indicator value is 100 percent. If red it equals 0 percent.
Period and overbought/oversold areas
The period is a candlestick quantity used for data collecting. It is set in the indicator settings and equals 14 by default.
Overbought and oversold values are also set there and equals 70 percent and 30 percent by default respectively. If the overbought value gets closer to 100 percent while the oversold value gets closer to 0 percent then the signals become more precise. Although their quantity decreases.
How do you use Relative Strength Index formula?
If the RSI indicator intersects on a higher level it means an overbought case. When prices are increasing too high and fast and soon they are expected to decrease. If the indicator intersects on a lower border it means an oversold case where prices are getting too low too fast and they are expected to increase.
What Is an RSI Buy Signal?
The RSI can be used as a signal generator in its own right. A buy signal occurs when the indicator line crosses the 30 level upwards.
Is this the only possible signal? A change in the direction of the indicator line can also be taken as a signal. If the indicator changes direction from downwards to upwards in an oversold condition we get an early buy signal from the RSI.
What Is an RSI Sell Signal?
Similar 2 types of signals can be found for sales. The first is when the indicator crosses downwards the level of 70. This is a classic sell signal based on the RSI.
The second signal is when the indicator changes direction from upwards to downwards in the overbought zone, i.e. above level 70. Naturally, this signal will also occur as an early sign to sell.
We encourage you to read about divergences on RSI, because in divergences there is a huge potential for an interesting use of this tool. It's an interesting way of using the Relative Strength Index on the IQ Option platform.
Remember that you do not need to know the Relative Strength Index formula by heart, because the IQ Option platform counts the values itself and displays the finished RSI line chart in a separate window pinned below the price chart. Your task is only to read the indicator and skilfully interpret its behaviour. The RSI can also be an excellent confirmation of all price action techniques. How do you use the RSI? Share your ways with our readers in the comments below.
We wish you successful trading!