The RSI (Relative Strength Index) indicator is a technical analysis tool used to determine the strength or weakness of the price movement of a particular currency or stock over a specified period of time. This indicator was developed by J. Welles Wilder.
How does RSI work?
• RSI measures the ratio of upward price movements to downward price movements over a period of time (usually 14 days) and then converts this ratio to a value between 0 and 100.
Calculation method (simple):
1. Average gains and losses are calculated over the period.
2. Gains are divided by losses to obtain Relative Strength (RS).
3. Convert RS to RSI using the formula:
How is RSI interpreted?
• If the RSI value is:
• Above 70: The asset is considered “overbought” and a price correction may occur.
• Below 30: The asset is considered “oversold” and a price rebound may occur.
Uses of RSI:
1. Determine entry and exit points:
• If the RSI is very low (below 30), this could be a buying opportunity.
• If the RSI is very high (above 70), this could be an opportunity to sell.
2. Confirm trends:
• If the RSI moves with the price, it supports the strength of the current trend.
• If the RSI is moving opposite the price (divergence), it may indicate a trend reversal.
3. Use custom levels:
• Saturation levels can be adjusted (e.g. 80 and 20 instead of 70 and 30) depending on the market or financial asset.
