Forex Education for Relative Strength Index (RSI) indicator | Forex Signals Market
Tuesday, December 22, 2015

Forex Education for Relative Strength Index (RSI) indicator

For those traders who have recognized the value of forex education will know the importance that has been given to the indicator Relative Strength Index (RSI). The Relative Strength Index (RSI) was developed by J. Welles Wilder, Jr.

According to forex education, this indicator is able to determine overbought and oversold price levels as well as generate buy and sell signals. Is well known, very popular and widely used from traders community. It is a momentum oscillator and as such it measures the rate of change of a given security’s price. Since it is also a bounded oscillator, it allows to spot overbought and oversold areas on the price chart.

We can calculate the Relative Strength Index (RSI) using the following formula:

RSI = 100 - 100 / (1+RS)
RS = Average gains / Average losses

At forex education, we learn that the indicator moves from 0 to 100. It means that is  bounded oscillator who give us the possibility to identify overbought and oversold areas. Generally, RSI values over 70 consider as overbought and values below 30 as oversold. Sometimes we have to change these levels in order to operate better, in particular, markets or under specials trading conditions.

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When Relative Strength Index crosses the oversold line generate a buy trading signal. in the same way, when Relative Strength Index crosses the overbought line generate a sell trading signal. At this point, we have to be very carefully because the cross from overbought or oversold levels it's not necessary and a trend reversal.  There are many traders who consider as a trading signal or pay special attention when Relative Strength Index cross the zero line. it is obvious that across from above considered as a bearish signal and conversely the cross from below must be considered as a bullish signal.

Many times happens to produce divergence between Relative Strength Index and the price. In this way, RSI indicator generates powerful buy or sell signals.

With forex education, we can comprehend that a positive divergence occurs when the RSI makes a higher bottom than the bottom of the price and a negative divergence occurs when the RSI makes a lower top for the top of the price.

Forex Education gives us the capability to understand the failure swings patterns.
We can observe that Relative Strength Index formed patterns who call them failure swings.
Bullish Failure Swing is the pattern where RSI forms a new low below the oversold line, then bounces up above it, forms a higher low above the oversold line and then goes up even further above the previous high.
Bearish Failure Swing is the pattern where RSI forms a new high above the overbought line, then bounces back below it, forms a lower high below the overbought line and then goes down even further below the previous low.

The parameters of Relative Strength Index indicator is 14 days for the time period with 70 as overbought and 30 as oversold levels. Every trader has the ability to change parameters according to his needs and his trading strategy.

Usually, a long-term trader is possible to feel more comfortable  with higher parameters who convert the indicator to less sensitive. In this way has the possibility to eliminate the appearance of false trading signals.

A short term or an intraday trader instead is possible to feel more comfortable  with lower parameters who makes the indicator more sensitive. In this way has the possibility to enter the market very early, but with the risk of a false trading signal.

The forex education for us is the most powerful advantage held by a trader towards the market in an effort to make a profit. For that reason, we propose a serious study of the index RSI that has great potentials and offers good results.

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