Oscillators: The Basics of RSI

Relative Strength Index

What is technical analysis?

The use of charts and the study of historical price movements to help predict future trends. By looking through prices, the goal is to determine patterns and past signals to try and identify the direction of future prices.

Every technical trader is looking at the same chart which helps solidify the trend through self-fulfilling prophesy.

How to determine a trend using the RSI curve

The relative strength index (RSI) tracks the ability of an instrument to close higher or lower over your selected time frame. When the RSI tips above 70, the asset is thought to be overbought. When the curve touches below 30, the instrument is considered ‘oversold’.

Indicators can read as either overbought or oversold for a long period of time therefore reaching these levels is not necessarily a signal that the trend will immediately reverse – when the curve crosses back from the 70/30 level, this is when there is a signal that the trend has reversed.

When the RSI moves back into the 70 – 30 zone after trading above or below these parameters, there can be a strong bullish or bearish movement as a result.

Divergence occurs when the price of an asset makes a new high/low however the indicator fails to do so.

Bullish Divergence – When the price moves to new lows and the RSI stays at a higher low.

Bearish Divergence – When the price moves to new highs and the RSI stays at a lower high.

*On your MT4 chart, the RSI curve should appear in a separate window below the price chart.

By Avatrade Dealing Room

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