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Then, what is the RSI indicator?
An indicator is a tool that provides data from the results of certain formula calculations to measure and assess market conditions so that traders can predict the next direction of the market. In the world of forex trading, the term indicator is better known as forex indicator. Well, one of them is the RSI indicator. The RSI indicator is a technical indicator that measures the magnitude of price changes in a certain period to analyze whether conditions in the market have reached the point of oversold or overbought.
RSI stands for relative strength index. What is the saturation point? Oversold and overbought are technical terms used to predict the likelihood of a correction or reversal. Simply put, the saturation point refers to a condition that has reached the highest or lowest point, but within the estimated limit because the saturation point is considered impossible to move higher or lower.
Well, the forex RSI indicator is used to identify oversold and overbought levels for an investment asset and can also be used as a 'signal' of the emergence of trading opportunities. The RSI itself is an oscillator-type technical indicator. This type of indicator oscillates between two boundaries, above and below the midpoint, and its values help to measure the strength and momentum of a trend. Below is a discussion of how the RSI indicator works. However, before traders read it, make sure to check and fill out the GIC Trader Assessment.
RSI stands for relative strength index. What is the saturation point? Oversold and overbought are technical terms used to predict the likelihood of a correction or reversal. Simply put, the saturation point refers to a condition that has reached the highest or lowest point, but within the estimated limit because the saturation point is considered impossible to move higher or lower.
Well, the forex RSI indicator is used to identify oversold and overbought levels for an investment asset and can also be used as a 'signal' of the emergence of trading opportunities. The RSI itself is an oscillator-type technical indicator. This type of indicator oscillates between two boundaries, above and below the midpoint, and its values help to measure the strength and momentum of a trend. Below is a discussion of how the RSI indicator works. However, before traders read it, make sure to check and fill out the GIC Trader Assessment.
How does the RSI indicator work?
On forex trading platforms like Metatrader, the RSI indicator appears in the form of an up-and-down line below the price chart. However, traders do not need to calculate manually, because the RSI can be brought up by simply clicking 'Insert', then selecting 'Indicators', after that selecting 'Oscillators', and selecting 'Relative Strength Index'. This indicator measures the upward and downward movement of the price with a ratio range of 0-100.
If the RSI indicator is at a ratio of 70 or greater, it means that an asset has been overbought, so it is likely that the price will turn down or correct.
For traders, this means time to sell. However, if the RSI value is at a ratio of 30 or smaller, it means that an asset has been oversold, so it is likely that the price will turn up.
For traders, this means time to buy. The RSI calculation by default usually uses a period of 14, but traders can change this RSI period. However, changing the period by increasing or decreasing the period can change the sensitivity.
For example, a 7-day RSI will be more sensitive to price movements compared to a 21-day RSI.
However, it also depends on the volatility of the asset's price. High-volatility pairs such as EUR/USD will get to oversold or overbought levels faster than USD/CHF. Therefore, the use of this indicator should be accompanied by other technical indicators so that the calculation is more accurate.
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RSI Bullish Divergence: Characteristics, Examples, Conditions, and How to Read |
How to set the RSI indicator?
For beginners, using indicators may seem difficult. However, over time, traders have to use indicators or multiple indicators to get more accurate signals. So, if you are a beginner, here's how to set the RSI indicator on the trading platform.1. Go to the 'Chart/Graph Menu'
[caption id="attachment_3265" align="aligncenter" width="1024"]
Charts/Charts Menu on the GIC Demo Account Trading Platform[/caption] First go to the 'Charts/Charts Menu' on your trading platform, then click on 'Insert', select 'Indicators', then 'Oscillators', after that select 'Relative Strength Index'.
2. Changing the setting of the 'RSI Period Parameter' or the indicator's time frame
[caption id="attachment_3266" align="aligncenter" width="1024"]
RSI Indicator Menu on GIC Demo Account[/caption] After the display as above appears, traders can change the RSI period number. The RSI time period created by J. Welles Wilder is 14 days, which according to Wilder is a good standard period for daily chart analysis.
The shorter the time period you choose, the more volatile the RSI line will be. Conversely, the longer the RSI time period, the less price-sensitive the line will look. Once you have decided on the RSI period setting, click 'OK', then the RSI line indicator will appear on the chart.
3. Reading the RSI line display
[caption id="attachment_3267" align="aligncenter" width="1024"]
RSI Indicator Display on GIC Demo Account[/caption] The blue line in the image above is the display of the RSI indicator. The RSI as described consists of a line of 0-100. On this indicator, you can see the 'upper boundary' and 'lower boundary' lines.
So the RSI consists of an overbought line (above the 70 mark) and an oversold line (below the 30 mark). This means that if the RSI line is below 30, the price tends to be oversold. On the other hand, when the RSI line is above the 70 mark, the price tends to be overbought. This setting also usually applies to the setting of the stock RSI indicator.
Forex trading tips using the relative strength index indicator
The relative strength index indicator is commonly used to determine the right entry time by looking at overbought and oversold levels, as well as observing the possibility of a trend reversal by looking at divergences to price movements.
What is divergence? Divergence is a situation where the direction of movement of the indicator and the direction of the price movement diverge. Here are trading tips using the RSI quoted from DailyFX.com.
1. Pay attention to the middle level or center line on the indicator
All oscillator-type indicators such as stochastic indicators, MACD indicators, and including relative strength index indicators, have a middle level or center line which is usually at the 50 or 50% level.
This center line is often overlooked by traders, even though the middle level of this indicator indicates the momentum of a reversal of price movement when there is a retracement, or even when there is a change in trend direction.
What is the function of the center line? When the RSI breaks the center line upwards, it indicates a buy signal, and conversely, when it breaks the center line downwards, it signals a sell signal.
2. Adjust the use of RSI indicator parameters to the trading time frame
The default time period on the trading platform for almost all oscillator-type indicators is 14 including the RSI. The creator of the relative strength index, Welles Wilder recommends using the 14 period on the daily time frame.
According to Wilder, the smaller the measurement time period, the more sensitive it will be, making it difficult to observe, while if the time period is larger, it will be less sensitive, thus affecting the accuracy of the measurement.
So, if you are going to use the RSI on a time frame that is lower or higher than the day trade, it should not be based on the default parameters. Then, how is the adjustment? Basically, the smaller the period setting, the more often trading signals will be generated.
Day traders with a time frame of 1 hour or less usually use the RSI period 9 indicator, while scalpers use the period 7. While medium and long-term traders use periods of 14 or 25.
Still having trouble understanding the basic techniques of forex trading?
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