In June 1978
Welles Wilder's article introduced the Relative Strength Index (RSI), which is a widespread oscillator very helpful in currency trading. Mr. Wilder's book, "New Concepts in Technical Trading Systems", also provided step-by-step instructions on counting and explaining the RSI.
The name "Relative Strength Index" is slightly deceptive, because there is no comparison of the relative strength of two securities in the RSI, but rather the single security's domestic strength. "Internal Strength Index" might be a more suitable name. Two market indices in currency trading, which are often known as Comparative Relative Strength, are compared by Relative strength scales.
When the RSI was introduced,
Wilder advised to use a 14-day RSI, but the 9-day and 25-day RSIs were also popular. Moreover it is a chance to find the period that would be more suitable for you in currency trading during the experiments with changing the number of time periods in the RSI calculation. (The unsteadiness of the indicator depends on the number of days was used to calculate the RSI - the indicator will be more inconstant, if it was used the fewer days.)
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The RSI
arranges between 0 and 100 and it is also named in the market of currency trading as a price-following oscillator. The best analysis of the RSI was found out: it is better to find a divergence in which a new high is being made by the security, but the RSI is going down to surpass its previous peak. This divergence means that soon the reversal will come. A "failure swing" completed, when the RSI turns down and decrease below its most recent low.
The fact
that the failure swing happened proves the coming reversal. Mr. Wilder's described in his book five uses of the RSI in analyzing commodity charts. You could also use this method as the other security types.
Tops and Bottoms;
Before the underlying price chart, the RSI surmounts above 70 and falls below 30 as usual. Chart Formations; chart patterns, such as head and shoulders or triangles that could or could not be evident on the price chart, are often formed by the RSI. Failure Swings (which in currency trading is sometimes called support or resistance penetrations or breakouts); the RSI exceeds a previous peak (high) at this moment or falls below a recent trough (low).
Support and Resistance;
sometimes more clearly than price themselves, levels of support and resistance are demonstrated by the RSI. Divergences; As it was described earlier, in the market of currency trading , divergences happen when the price goes lower (or higher) and it isn't affirmed by a new high (or low) in the RSI. Prices usually reform and follow the RSI. It would be good to read the Mr. Wilder's book, where you could find additional information.
In the market of currency trading ,
there are all possible merits of the indicators situated in an area from 0 to 100. The two control levels (the higher bottom control level is above 70, the lower bottom control level is below 30) are put on the chart with the help of horizontal markers.
In currency trading
while the RSI increases and overcomes the top control level (above 70), the indicator displays the oversaturation of the market with buy trades, and then begins the zone of sales. Conversely, when the RSI crosses the low bottom control level (below 30), the indicator displays the oversaturation of the market with sell trades, and then starts the buying area. In currency trading,we advise you to test this indicator in demo account trading before using it in real account.
