Relative Strength Index
Relative Strength Index, or RSI, is a popular indicator developed by a technical analyst named J. Welles Wilder, that helps traders evaluate the strength of the current market. RSI is similar to Stochastic in that it identifies overbought and oversold conditions in the market. It is also scaled from 0 to 100. Typically, readings of 30 or lower indicate oversold market conditions and an increase in the possibility of price strengthening (going up). Some traders interpret an oversold currency pair as an indication that the falling trend is likely to reverse, which means it’s an opportunity to buy. Readings of 70 or higher indicate overbought conditions and an increase in the possibility of price weakening (going down). Some traders interpret an overbought currency pair as an indication that the rising trend is likely to reverse, which means it’s an opportunity to sell.
RSI can be used just like the Stochastic indicator. We can use it to pick potential tops and bottoms depending on whether the market is overbought or oversold. RSI is a very popular tool because it can also be used to confirm trend formations. If you think a trend is forming, take a quick look at the RSI and look at whether it is above or below 50. If you are looking at a possible UPTREND, then make sure the RSI is above 50. If you are looking at a possible DOWNTREND, then make sure the RSI is below 50. To avoid fakeouts, we can wait for RSI to cross below 50 to confirm our trend. Sure enough, as the RSI passes below 50, it is a good confirmation that a downtrend has actually formed.
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