Relative Strength Index is one of the most popular oscillator that measures and evaluates the effect of price movements. For the first time the indicator was introduced in June 1978 Vollesom Wilder. The basic principle of the indicator, the comparison between the rise and fall of the price for a certain period of time. The result of this comparison, the indicator serves as evidence, which measures the fluctuations scale (minimum scale - 0, maximum - 100). This indicator uses only one parameter - the time period used in the calculation.
The indicator is calculated:
For the calculation of the numerical values of the indicator uses two formulas (formulas shown on the photo).
Formula number 1. First formula, which we use, is to find the average value of (RS) between the positive changes in the closing price (U) and negative changes in the closing price (D).
Formula number 2. I think this explanation is not required, since we just substitute the average U and D and produce the final calculation.
Like all oscillators, relative strength index accuracy depends on the period, which can be set to configure the indicator. Recommended to use the 14-day period, as these will be the most optimal, and reflect the current state of the market. Typical for the oscillators become oversold and overbought, but the popularity of this indicator is that at the intersection of these zones, the RSI gives the most accurate signals to buy or sell.
Overbought and oversold levels:
The creator of the indicator "Relative Strength Index" Volles Wilder, recommended $ 70 and 30 for use as an overbought and oversold levels. But at the moment traders use different levels, as large levels will give more accurate signals. For example, many traders use a mark of 80 and 20, so very accurate signals. As the central and baseline use mark of 50. But there are some tips for setting levels: a downtrend levels and shift the center line down, respectively, in an uptrend - up.
Relative Strength Index is recommended to use only on the market in the absence of a trend. When using an indicator of a trend, you can determine the point of entry into the market, in other words the local minima and maxima. Also, if a trending market conditions, RSI is not recommended for use as a leading indicator, as it can lead to a lot of false signals, respectively, in the loss of funds.
Using the "Relative Strength Index":
Frequently encountered signal indicator RSI is advancing chart. In other words, the indicator line quickly formed peaks and lows than does the price chart. That was the maximum confidence, new vertices must be in the area above 70 and lows - below 30.
When the market is trending state, the relative strength index is used to determine the direction of the trend. If the line of the indicator above 50, the market upward trend , if it is below 50, respectively, the downward trend in the market and open positions should be based on the data signals. However, these signals will be true only in a trending market conditions, the lateral movement of the market (flat), all the signals are false.
The levels of overbought and oversold conditions stated above. Just want to add - a signal to buy is crossing the line indicator oversold bottom up, and a signal to sell is crossing the line indicator overbought levels down.
To avoid false signals sent by the indicator RSI, is a win-win way. If overbought indicator forms a double top in the shape of the letter "M", and the second peak lower than the first - it is a signal to sell. The same is true of the double bottom, only the second low must be higher than the first.
Signal for the buying and selling is the same, and divergence , which we have repeatedly recalled.
For a typical application of the RSI chart patterns. Realezuyutsya all basic patterns - wedge channel, head and shoulders, double bottom, double top, pendant, diamond ... and this is not a complete list.
Indicator "Relative Strength Index" is one of the leading indicators, which should be in service every trader. He rightly claims to be the first, thanks to precision signals.