Relative Strength Index - indicator to measure the relative strength of the trend
Described here is one of the most serious and popular technical indicators for trading in the financial market. RSI algorithm profile is measurement of trend strength relative to a given time period.
This technical tool also refers to the "old-timers" placed in the majority of trading platforms.
The value of the named indicator is that its signals are the most accurate when identifying overbought and oversold areas of financial asset as well as trends of the cost transition from one state to another.
The RSI indicator is related to the type of oscillators, and its operation algorithm is based on the determination of the relative strength of the movement for a certain period of time. That is, if the indicator is set to the period of 21, the RSI will take 21 price bars to calculate the relative strength and will calculate the movement strength for the above mentioned period on the financial instrument where it was applied.
RSI based trading signals
- there is a scale from 0 to 100 on the indicator, and in the preset parameters the levels of 70 and 30 are marked. These guidelines are overbought – oversold levels. In this case, the indicator’s signal line getting outside of one of these levels means that the current financial asset is the most overbought or oversold in comparison with all the prices of the period taken for analysis. The fact itself of the indicator being in a given zone means that the moment of the price reversal for the local pullback is approaching or a trend break to result in going to the opposite direction. Thus, if the price went to the overbought zone (level 70), and turned to go down – we sell (Put-option). If the value of a financial instrument entered the oversold zone (level 30) and back crosses this level of growth – we buy (Call-option).
- if two overbought - oversold levels are removed, and the scale of the RSI indicator is divided equally, setting a level of 50, then we get the level of transfer of an asset from overbought to oversold condition. Thus, we will be able to intercept the price of the instrument at the time of trend from which to derive additional income.
- the RSI indicator is often used in conjunction with other technical indicators. For example, if you combine our indicator with MACD histogram, which clearly shows the direction of the trend, then using the RSI one can "catch" the end of pullbacks and constantly enter on the continuation of the price trend.
- among other things the RSI indicator gives a unique signal of the trend channel built by its breakdown. That is, through the main points of support and resistance of indicator line, the trend line is created, which if broken indicates the birth of a new trend. On the basis of this only one signal there is a trading strategy which is placed on the pages of our “trading strategies” branch.
RSI implementation specifics
RSI unlike the vast number of indicators t is not suitable for trend trading, which makes it an indicator of exceptional value. Thus, the addition of this indicator to any strategy set will make it more resilient to any market situation.
The possibility to change settings of indicator and to increase the period allows using RSI at any time frames. That is, the indicator can be used for intraday trading as well as for medium and long term systems of binary options trading.