The Relative Strength Index (RSI) is a technical indicator that belongs to the oscillators, which are tools used to identify overbought and oversold market conditions.
It is a standard indicator on the MetaTrader trading terminal.
Key Levels of the RSI Indicator
The RSI values fluctuate between 0 and 100. The 14-period version is commonly recommended, but traders also use 9-period and 25-period RSI in practice.
Market Analysis Using the RSI Indicator
The most common way to analyze the RSI indicator is by looking for divergences. This occurs when the price chart forms a new high, but the RSI does not exceed its previous high. Such a divergence may signal a potential price reversal.
If the RSI then turns downward and falls below its trough, it completes a “failure swing.” A “failure swing” confirms an upcoming price reversal.
There are several signals from the RSI:
“Peaks and Troughs” – RSI peaks typically form above the 70 level, while troughs form below 30. These often precede the formation of peaks and troughs on the price chart.
“Chart Patterns” – patterns such as head and shoulders, triangles, and others found on the RSI indicator may not be visible on the price chart.
“Failure Swing” – a break of support or resistance level. This happens when RSI rises above a previous high or falls below a previous low.
Formula for Calculating the RSI Indicator
RSI = 100 – (100 / (1 + U/D)),
where:
- U – average of positive price changes;
- D – average of negative price changes.
FAQ
What is the RSI indicator used for?
The RSI indicator is used to identify overbought and oversold market conditions, helping traders spot potential price reversals.
How is the RSI calculated?
The RSI is calculated using the formula: RSI = 100 – (100 / (1 + U/D)), where U is the average of positive price changes and D is the average of negative price changes.
What are the key levels for RSI?
The RSI ranges from 0 to 100. Key levels are 70 for overbought conditions and 30 for oversold conditions, with 50 indicating neutral market sentiment.
