The Relative Strength Index (RSI) is an stochiastic oscillator that moves up and down in response to changes in market rates.
It has garnered great respect among traders as one of the most accurate indicators for evaluating current market trend strength.
Here is how it works. A reading of 30 or under is considered "oversold" and identifies a potential rate increase. A reading of 70 or higher is considered "overbought" and identifies a potential rate decrease.
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The platform will calculate the RSI for you, but it is good to understand how it works, because there are different ways to calibrate it.
The basic number of trading periods that the RSI is set for is 14 – this was the original value that the inventor set for it. This can be changed, and some traders have found different values useful.
However, it is wise to start with the original value and to observe its operation before experimenting.
The first components to be calculated are the total average gains and the total average losses. This information is necessary to arrive at the relative strength (RS) value for the currency pair.
Average gains are calculated by adding up all the gains for the past fourteen reporting periods and dividing by 14; average losses are calculated in the same manner with the total of all losses for the previous fourteen reporting periods summed and divided by 14.
The Relative Strength is then converted to an index value and plotted on a scale from 1 to 100.
Using the RSI in trading is much easier than calculating it. When the “overbought” or “oversold” indication appears, watch for the trend to move in the opposite direction.
But, if a currency pair has remained overbought or oversold for a very long time, and no movement takes place, it’s often the case that a further move in the same direction (higher or lower) will occur.