What is RSI - How to use RSI indicator effectively

What is RSI - RSI stands for "Relative Strength Index" - Relative strength index. It is one of the most commonly used technical indicators in Forex technical analysis today. Let's dive into how to use the RSI effectively.

Basic RSI indicator - Relative Strength Index

The RSI indicator, first introduced in 1978 by J. Welles Wilder, is used to identify the market's overbought or oversold condition for the price of a currency pair.

The formula for calculating the RSI indicator is as follows:

RSI = 100- (100 / (1 + RS))

Inside:

RS = total increases / decreases

The RSI is usually calculated based on the last 14 days and uses the closing price to calculate

The easiest way to use the RSI indicator

On the chart, the RSI is indicated by a line that runs in the range from 0 to 100.

If the RSI rises above the level of 70, it indicates that the situation of overbought is reversible.

Conversely, the RSI crosses below the 30 zone, which indicates an oversold situation, which can reverse to up.

Note: RSI does not always go below 30 and go back up or go above 70 and back down also create good trading opportunities, need to combine with some other tools to get credit. Best deals sign.

How to use the RSI indicator to look for divergences

Divergence is a phenomenon where the market is losing strength. Divergence is reflected in the heterogeneity of prices and technical indicators. Specifically, the price creates a new high but the RSI creates a low (negative divergence), or a new low, while the RSI creates a higher low (positive divergence). The difference between price and RSI is a warning signal to traders about the possibility of market reversal.

In addition, want to use RSI most effectively should combine RSI with the trend line, with the support - resistance area….

How to set the RSI indicator in MT4 software

The default RSI is available in the MT4 software and requires no additional setup. To turn it on, follow these steps:

Method 1, go to Insert -> Indicators -> Osillators -> Relative Strength Index (RSI)

Method 2, double click on the f (Indicator) icon in the Navigator panel on the left of the screen, select Osillators -> Relative Strength Index (RSI).