Trading | 7 months ago
Profitability of any trade depends on technical analysis. This is the reason traders use technical analysis. So, in this article we will discuss how to trade using the Relative Strength Index (RSI).
What is Technical Analysis?
Technical analysis is a process to predict the future price of any trading instruments by observing the current price movement, trends, trading volume, historical chart etc. There are many other tools or indicators built into the trading platforms like MetaTrader 4 which helps a trader perform technical analysis more efficiently. Relative Strength Index (RSI) is one such efficient indicator.
What is the RSI indicator?
The RSI indicator measures the current price strength of a trading instrument in relation to previous prices. The value of this indicator is expressed in the range of 0-100. Whenever the RSI indicator value is 70 or more, the trading instrument is considered overbought and whenever the RSI indicator value is 30 or less the trading instrument is considered oversold. It uses the below formula to calculate its value.
RS = Average of 'N' day's closes up / Average of 'N' day's closes down
Here N can be 20 days or 5 days etc. Depends on your time interval
RSI = 100 - (100 /1 + RS)
What is the use of RSI indicator?
The RSI is a leading indicator, that means we can use the value of RSI indicator to our advantage. It can be used to generate potential buy and sell signals. It can also be used to confirm the price movement since it shows the overbought and oversold conditions. It warns for potential price reversals as whenever the market is overbought a slight reversal in price value can be seen.
Where can I find the RSI indicator in my trading platform?
The list of indicators is available in all trading platforms. you can simply search for RSI in the search box. However, if you are using MetaTrader 4 then you can simply click on the insert tab there you'll find an Indicator menu option, choose the oscillators and there you will see the Relative Strength Index (RSI) Indicator. Just select that and drop it onto the chart. You will be able to configure it periods.
How to Use Relative Strength Index (RSI) Indicator for Trading?
Using Relative Strength Index (RSI) Indicator is very straightforward. You just have to configure a time period and that's it, it will calculate the values automatically. If the RSI indicator value is 70 or more do not buy that trading instrument as it is already overbought, wait for the price reversal. Similarly, if the RSI indicator value is 30 or less then do not sell the instruments as it is already oversold. The best RSI indicator settings depends on your trading time. The settings differ from time interval to time interval, the setting is different for day trader and for swing trader. For day traders 14 periods is most suitable and for swing traders 30 periods is sufficient.
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