Relative Strength Index - Relative Strength Index
Relative Strength Index RSI was developed by J. Welles Wilder trader. This is one of the most popular momentum indicators, which measures the internal capacity of the security. As is the case with the indicator ROC, RSI is trying to determine overbought and oversold conditions, ie the conditions under which the securities rate is overvalued or undervalued. RSI has a value from 0 to 100.
Relative Strength Index formula is as follows:
100-100 / [(Up price movement / Downward price movement) +1], where
Up price movement - move prices higher, the average price the previous day's close.
Downward price movement - movement of the price down, the average price the previous day's close.
The parameters used with the indicator RSI:
J. Welles Wilder suggests using light with a period of 14. However, according to the practical calculations, it is sometimes not very effectively. Experienced traders recommend the use of Fibonacci numbers in a specified period of time.
As for overbought / oversold and Wilder suggests using the number 30 (oversold) and 70 (overbought area).
How to trade ...
There are two basic ways to interpret the relative strength index, which is used in the market.
The first way is to look for signals to buy \ sell based on the intersection of the indicator with the overbought levels \ oversold. It is usually said that if the indicator is above 70 (in some cases 80), it is overbought and when the indicator value is less than 30 (or 20), it is oversold.
Another way to signal to buy \ sell is to find discrepancies indicator of the relative strength of the RSI and price action - namely the divergence.
There is a bullish divergence and a bearish divergence.
A bullish divergence occurs when the price reaches a new price lows and the indicator values ??in the zone 20 or 30 is not supported Similar price minima.
A bullish divergence occurs in cases when the price reaches a new high in overbought territory, namely, (70-80), and the values ??of the indicator does not confirm these apex.