As a trader, you are constantly searching for resources that will enable you to make wise trading choices. A well-liked technical indicator that assesses the strength of price movement in a security is the Relative Strength Index (RSI). It gives traders information about a security’s momentum and may help them spot potential trading opportunities.
Â
The ratio of price movements that are upward to those that are downward over a given period is used to calculate the RSI. It has a range of 0 to 100, with readings above 70 indicating an overbought security and readings below 30 indicating oversold security.
The RSI can be used by traders to spot divergence between price and momentum as well as potential trend reversals and trend strength.
Â
The RSI can give you insightful information about the momentum of a security, which can help you become a more knowledgeable trader by incorporating it into your trading strategy. You can make more intelligent and successful trades if you know how to interpret RSI readings and use them in your trading decisions.
How to use RSI (Relative Strength Index)?
It is not difficult to set up the RSI on a trading chart. Open a chart for the security you want to analyze first after choosing it. Then, on your trading platform, find the “Indicators” or “Studies” button, and choose the “Relative Strength Index” from the list. Set the RSI’s time frame, which is typically 14 days but can be changed to suit your trading preferences and style.
Below you have a few examples:
Dow Jones Industrial Average 30 (US30) 1D Chart
In the first example, we have the chart for Dow Jones 30. The principle is to find the oversold and overbought levels. As you can see, when the RSI shows a level above 70, is considered an overbought zone. The price from $34,296 went down to $28,728. To identify an oversold level, you can look on 26 September 2022, the price from $28,605 skyrocketed 20%.
Apple (APPL) 1H Chart
In this example, we have the Apple chart evolution. On 22 Feb 2023, The RSI level was below 30, but the market still didn’t react based on this “signal”. Only after 9 days, did the market bounce from the support level.Â
EURUSD (FIBER) 15m Chart
In this example, we’re looking at currencies (EURUSD). On 3 May 2023, we can notice another example of “market delay”. The RSI broke below the 30 levels, but the market still dipping. From that moment, the market dipped an extra 20 pips, to move uptrend 40 pips and then again fell to even breaking the support again.
Is RSI (Relative Strength Index) an efficient tool?
Overall, RSI can be a valuable indicator for spotting possible overbought or oversold levels, which might present trading opportunities. But it’s crucial to understand that RSI shouldn’t be utilized in isolation; rather, it should be used with other technical analysis tools and fundamental analysis.
