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Relative Strength Index (RSI)

The Relative Strength Index (RSI) is one of the most popular Technical Indicators in oscillator charting methods. RSI is normally used to compare the currency strength and to predict currency price movements.

Developed J. Welles Wilder, the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. Traditionally, and according to Wilder, RSI is considered overbought when above 70 and oversold when below 30. Signals can also be generated by looking for divergences, failure swings and centerline crossovers. RSI can also be used to identify the general trend.

RSI is an extremely popular momentum indicator that has been featured in a number of articles, interviews and books over the years. In particular, Constance Brown's book, Technical Analysis for the Trading Professional, features the concept of bull market and bear market ranges for RSI. Andrew Cardwell, Brown's RSI mentor, introduced positive and negative reversals for RSI. In addition, Cardwell turned the notion of divergence, literally and figuratively, on its head.

Mathematics calculations behind RSI charting:

RSI= 100 - 100/(1+RS) where RS = sum of positive closing prices divide by sum of negative closing prices. RSI helps traders to predict price movements and to identify market turning points. A rise in RSI will normally be followed by a rise in the currency price; and vise versa, a downtrend RSI indicates that the currency price is more likely dropping.

In addition to being a momentum indicator, Forex traders also use the RSI as a volume indicator. Because of the nature of the Forex market as an ”Over the Counter” market (OTC), real time volume reporting is not possible. The RSI has a scale from 0 to 100. Any reading that is below 30 denotes an oversold market condition while any reading above 70 denotes an overbought market condition.



Five Different Ways of Using the RSI:

1. To indicate overbought or oversold market conditions. These conditions are indicated by reading at 30 or 70.

2. Divergences – if the price of a currency reaches a new high and the RSI doesn’t show the same situation, this normally indicates that a price reversal is imminent.

3. Support & Resistance - The RSI can also be used to indicate the support and resistance levels of a currency trend.

4. To indicate chart formations more clearly. Chart patterns like “double tops” or “Head & Shoulder” can be seen more clearly with the RSI than on the price chart itself.

5. Failure Swings – if the RSI breaches its previous peak or low, this may mean that a price breach may be on the way.
 How to Make a Living Trading Foreign Exchange: A Guaranteed Income for Life (Wiley Trading)
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