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  1. Beginner
    Early Stages for Beginners
    8 Topics
  2. Forex Terminology
    11 Topics
  3. Margin & Leverage
    2 Topics
  4. Personal Psychology Questions
    2 Topics
  5. Psychology for Beginners
    7 Topics
  6. Intermediate
    Identifying Scams
    2 Topics
  7. Brokers for Beginners
    5 Topics
  8. Technical Analysis
    13 Topics
  9. Market Structure
    5 Topics
  10. Completion
    Risk Management for Beginners
    8 Topics
  11. Fundamental Analysis
    9 Topics
  12. Advanced
    Using Indicators
    6 Topics
  13. Technical Analysis (Part 2)
    8 Topics

Relative Strength Index (RSI)

The RSI is one of the most popular oscillators. It measures the magnitude and size of the latest changes in price over 14 periods by default (for example, 14 hours on the H1 chart, 14 days on the daily chart, etc.), but you can change the period based on your needs . As per the RSI’s formula, the average gain of the price during the tracked period is divided by the average loss, generating a figure from 0 to 100.

The indicator goes up when the number and size of bullish closes increase, and drops when the number and size of losses increase.

Basically, when the RSI increases during an uptrend, it suggests that more traders are going long on the currency pair. In a similar fashion, if the oscillator is declining in a bearish market, it demonstrates that more traders are shorting the pair.

The indicator is displayed below the main chart as an oscillator, to; a line that moves between two extremes, ranging between 0 and 100.


How to Use the RSI?

Below we’ll go over three ways you can possibly add the RSI into your trading as another confluence to go along with your technical analysis. 

  • Overbought and oversold levels – the main function of the RSI is to determine the overbought and oversold levels, which refer to the price of a currency pair in relation to its supposed fair value.

Basically, in an overbought condition, buyers are losing steam after a long rally, and the existing uptrend is likely to reverse. The same applies to oversold conditions in a bearish market.

The RSI has two lines representing these market conditions – the overbought line is at 70, and the oversold line is at 30. Thus, when the RSI breaks above 70, traders are ready to go short or exit existing long positions. When the RSI line enters the oversold zone, to; the indicator breaks below the 30 line and traders prepare to go long and/or close their short positions.

  • Divergences – Another way to use the RSI is to search for divergences formed between the price action and the indicator itself. The divergences can help you anticipate trend reversals or determine resistance and support levels.

The bullish divergence occurs when the price drops, resulting in lower lows, while the RSI score goes up, displaying higher highs. This shows that the downtrend is bottoming out as bulls become stronger, with demand for the base currency accumulating despite the bearish pressure.

The bearish divergence occurs during a bullish market, when the RSI score is declining while the currency price is increasing.

Remember that RSI divergences are more powerful during less volatile markets.

Crossover of centerline – while this is not a popular approach, some traders prefer to look for bullish or bearish signals when the indicator crosses its center line. For example, when the RSI crosses the 50 line from bottom to top, it suggests a bullish trend, so traders go long.