Relative Strength Index (RSI)

Relative Strength Index (RSI)

Let's talk about it-momentum.Yes,very important to every trader to have momentum in all aspects. One of the indicators that shows market momentum is RSI and when properly deployed it can result to consistent profitable results.

RSI provides traders with signals about bullish and bearish price momentum, and it is often plotted beneath the graph of an asset’s price. An asset is usually considered overbought when the RSI crosses above 70 thus seen as a signal to sell and oversold when it crosses below 30 thus seen as a signal to buy. The RSI works best in trading ranges rather than trending markets.

Middle line at 50 can be added whereby above this point, momentum is considered up and a trader can look for buying opportunities. And when the RSI drops below 50, it shows a bearish market trend, thus a trader can consider opening sell trades.

However, RSI may not be suitable for trading in strong trends when the RSI may stay overbought or oversold for long periods of time. If you see that there’s a strong trend in the market, consider selling when RSI is oversold in a downtrend, and buying when RSI is overbought in an uptrend.

By default, Meta Trader will offer 14 as period. This parameter can be changed whereby short-term traders normally prefer using 9-period while those who prefer longer-term trading choose 25-period RSI. Thus, the smaller the period, the more fluctuations the indicator will make.

Profitabi;ity using RSI increases when you follow only those signals that are in the direction of the trend when the indicator leaves critical levels. For example, you can buy during an uptrend when RSI gets above 30.

Market reversal

Moreover, the divergence between RSI and price may indicate the market reversal. When the new high of the price is not confirmed by the new high in the RSI, it’s a bearish divergence, which is a negative signal. 

When the price forms a lower low but the minimum of RSI is higher than the previous one, it’s a divergence and thus bullish movement.