The technical indicator RSI
- Analyst AZA
How to properly use the technical indicator RSI.
The technical instrument for analysis - the indicator RSI, is one of the widely used and popular tools in the foreign exchange market. RSI belongs to the group of oscillators. The indicator is included in the classic set of analysis tools in trading terminals.RSI is an indicator that has only one line and is used to determine the strength of the mainstream. In addition to the strength of the trend, the tool can recognize possible reversal points.
How does this indicator work?
RSI operates in such a way that it compares: it relates the absolute parameter of price growth for a currency pair (forex) to a certain time interval, using the degree of fall of the pair for a specific period. Such performed operations are demonstrated to the trader in the form of a curve-graph, where the interval of readings can be from 0 to 100%. The indicator is characterized by the presence of one leading indicator - a period that can set the length of the time interval that is used in the calculations. Typically, the default is set to 14. This value can be modified depending on market activity, it will change the selected period. It should also be taken into account that, if the exchange is too active, the curve of the instrument will cross the level of 30 and 70%, but, as a rule, the indicators of the curve will not be used as signals.
To neutralize false signals, the period can be taken higher, for example, you can select up to level 21. The period is narrowed if the market is quiet, and accordingly, the signals will be seldom received, that is, they will not be effective and accurate.
Signal number one is a divergence - a discrepancy in the RSI data and indications of the movement of the price of a pair of currencies.
If the price shows peaks that are increasing, the RSI graph shows us two maxima that fall, under conditions of an identical period, it is a signal that the bulls are weakened, which means that the current bull trend can be reversed or a possible correlation (temporal correlation movement ) In the opposite direction. The same technique works on bears. In case, for quite a long time, the market is in high indications of the indicator, this indicates it overbought, which means that a reversal in the opposite direction can occur. A reading of 70% indicates overbought. The reverse is also true: if prices are undervalued, then the market can reverse. This hypothesis works at low indicator readings - 30% and lower.
For a trader, to enter and exit the market is better when the tool comes out of the oversold or overbought area. So, between these zones, the central region is located. To enter and exit, it is desirable when the indicators come out of the overbought or oversold area. If the indicators did not leave these zones, it is best not to enter into transactions. The RSI indicator should be used for:- analysis of the vertexes of the indicator and its bases;- graphical analysis of the figures on the chart of the indicator;- apply for analysis of support and resistance lines, and the level of the instrument's schedule;- analysis of the periods of the intersection of the indicator of control marks.
Also, keep in mind that using the indicator is better with other technical analysis tools. This is due to contradictory signals: choosing a real tactic, check well and prepare to ensure that the effectiveness of the application was high.
Technical indicators help traders correctly determine the direction of price movement for making profitable trades