RSI is an oscillator, as well as a reliable assistant for traders. It shows the overbought/oversold values in trade. Engineer-developer and entrepreneur J. W. Wilder developed this financial instrument in 1978. Many financial specialists know about this oscillator, because its use is accompanied high profitability.
What elements are in the index?
Oscillator RSI includes two parallel lines separating the overbought/oversold critical zones and a line chart that constantly changes direction. This instrument is located separately from the real graph and has a scale with interval: 0; 100.
What settings should I use for the index?
When you choose RSI from the menu of the indicators, you can go directly to its configuration. You can change or leave the default three basic parameters in this menu: period, overbought, oversold.
Parameter ‘period’ is the estimated time interval: days, hours, minutes, etc. Level accuracy of the index depends on its magnitude, i.e. when interval is longer, then graph becomes more smoothed, and if the period value is less, then graphics will be more abrupt. It is better for beginners to leave value of the parameter default.
Overbought/oversold parameters are set default with values: 30; 70. Because the developer of this instrument once set these values and demonstrated an excellent result. But many traders today prefer to set limits on the values: 20; 80 to avoid losing trades.
Different traders also differently configure the overbought/oversold parameters depending on their chosen to trade strategy. Fanciers of trades on the bearish trend set the limit lines in values: 20; 60, and those who like the bull trend, set limits on 20; 80.
Signal from an oscillator RSI on the bull trend
Signal from an oscillator RSI on the bearish trend
Such index configurations are required to filter weak signals and optimize trade with a specific strategy
How does work index?
Mechanism of the RSI financial instrument operation is as follows: if line of the graph has crossed the upper limit, then the demand has exceeded the supply, and the price direction is expected to turn downward, and if chart crosses the lower limit, then the offer has exceeded demand, and the price chart is expected to rise.
When to start buying or selling?
Of course, this is just a signal that demonstrates overbought and oversold trade, which does not guarantee an instant turn of the trend. A market can in the overbought/oversold status be long-term. But the reverse crossing of borders is a bright sign for buying or selling.
What is the Divergence? What to do during a divergence?
Divergence is the discrepancy between the price value and the graph indicated in the index scale. This is a serious signal about the impending cardinal turn in trend. A price will be adjusted towards the index’s progression before the trend turns.
It’s advisable to abandon trading operations with this oscillator until a new trend is determined when adjusting the price. Or use other indicators to continue effective trading.
RSI instrument was created almost half a century ago, but it is still relevant, because index allows you to create accurate forecasts and profitably trade both in classical markets Forex and binary options. Index is available on almost all brokerage sites.
You require learning the operating principle of this instrument; since this knowledge will help you avoid unfavourable deals. You can work the oscillator RSI together with other instruments and methods for technical analysis to make accurate predictions in trade.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future
GENERAL RISK WARNING