Technical Analysis

Relative Strength Index

Introduction

The Relative Strength Index (RSI) is one of the most popular indicators used by technical traders. It is an oscillator, which means it moves back and forth between 0 and 100 levels. It was first introduced by Welles Wilder in an article in Commodities Magazine (now known as Futures) in June, 1978. The RSI is used most often by day traders and other short term investors, but the information it provides can help all investors.

The RSI is a trend following oscillator that ranges from 0 to 100. It gives an indication whether the currency is currently "overbought" or "oversold", or in other words, it is a measure of momentum.

  • If a currency’s price is increasing, RSI will move upwards towards 100, implying buying or accumulation of the currency pair.
  • If the pair's price is decreasing, RSI will move downwards. This implies selling pressure or distribution.
  • When Wilder introduced the RSI, he recommended using 14-days as the default period. Since then, the 9-day and 25-day period RSIs have also gained popularity.

www.cmsfx.comBecause a trader can vary the number of time periods in the RSI calculation (and even use hours and minutes), it is suggested that you experiments with different parameters to find a period that works best for your particular trading preferences.

  • The fewer days used to calculate the RSI, the more volatile the indicator.

As the Euro price rises, as can be seen in August and the beginning of September, the RSI oscillator moves higher towards 100, reaching 70. When price is falling, as in the rest of September the RSI goes down, past the 50 centerline and continues down towards 30.

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