The technical indicator developed by Welles Wilder RSI serves to help investors gauge the current strength of the price the couple about their past performance. The usefulness of this indicator is based on the premise that the RSI usually reach the top or bottom before you do the actual price, giving a signal that a recession or at least a significant reaction in the price of the pair is very possible.
RSI readings above 70 indicate that prices are overbought and may begin to fall. Readings below 30 indicate that prices are over-sold and consolidation could be expected. The period of time determines the volatility of the RSI. For example, a period of 9 days will be more volatile than a 21 days.
The main purpose of the RSI is to measure the strength and weakness of the market. A high RSI, above 70, suggests a bull market is over-bought. Conversely, an RSI below 30 denotes an over-sold market or a bear market dying.
In addition, the added value of 50, can serve the same purpose as the zero line in other oscillators. The speed reduction of a current trend or a reversal in the trend might be indicated by crossing above or below 50.
Sell when RSI is above 70 or buying when the RSI is below 30 can be an expensive investment strategy. A move towards these levels is a sign that market conditions are ripe for a ceiling high or low market prices. However does not mean there is already a high or low limit. A divergence in this case could be a good option to confirm mixed signals and indicators.
An application of the RSI is divergence. Market prices continue to move up or down while the RSI does not move up or down during the same period of time. Differences may occur in a few trading intervals, but the divergence of a real range usually requires a long lead time, perhaps 20 to 60 periods. When the RSI begins to fall below the lowest point consists of a double-top high, this could indicate a reversal in trend and a buy signal. A double-minimum in the RSI with penetration up could signal a reversal of the opposite trend and a sell signal.
The RSI study may enhance the support and resistance zones. The support and resistance areas usually bring out clearly on the RSI before they clear the bar graph. Many analysts trace line support and resistance based on the RSI in the same way you would draw trend lines on a graph.
The daily bar chart is the most common graphical expression for the RSI. Additionally, you could draw a weekly chart to confirm the RSI indictions on the daily chart, the weekly charts offer more background when trends are tracked actively.
The recommended structure for the RSI is to use a 14-day RSI. (The RSIs of 9 and 25 days have also gained popularity lately). Because you can vary the number of time periods in the RSI calculation, we suggest experimenting to find the period that best suits your investment style or “trading”. (The fewer days used to calculate the RSI, the more volatile the indicator.)
