RSI is one of the most common and useful indicators in technical analysis. It helps a trader to analyze when the buying and selling phase of a currency reaches a critical point. This helps a trader to see current sentiments, if a reversal is at hand, or to locate an ideal point in which to enter the market. A solid understanding of RSI is a must for any trader who uses technical analysis in their trading decisions.
In addition to the techniques presented in this article, RSI can also be used to look at support and resistance levels and various chart patterns. By studying failure swings and by looking at how the market responds when RSI is approaching the 70 or 30 levels, the RSI can sometimes show more clearly than prices themselves, levels of support and resistance. RSI also often forms chart patterns such as head and shoulders or triangles that may or may not be visible on the price chart.
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RSI Summary |
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RSI gives an indication whether a currency is being overbought or oversold, or in other words it is a measure of momentum. |
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Trend Identification |
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Interpretation |
Description |
Results |
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1. Trend |
When a currency’s price is increasing.
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RSI will move towards 100.
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2. Oscillation |
RSI tops out at or above 70.
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Overbought - Sell
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3. Center Line Crossovers |
RSI crosses below the centerline.
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Bearish phase in market
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4a. Bearish or Negative Divergence |
Price is making a new high, but the RSI is failing to surpass its previous high |
Market top eminent - Selll |
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4b. Bullish or Positive Divergence |
Price is making a new low, but the RSI is failing to surpass its previous low. |
Market bottom eminent - Buy |
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Entry / Exit |
If the long-term trend is bullish |
Oversold readings mark potential entry points. |
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If the long term trend is bearish |
Overbought conditions make good entry points. |
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