Relative strength index forex

The relative strength index is simply an indicator whose function is to compare the magnitude of recent gains and losses over a specified period with the aim of the speed and change of price movement of a security. This sounds really important to everyone that has invested in the economic sector in one way or the other. Specifically, forex traders can gain a lot from this if they take out the time to study it well, understand it, and apply it correctly to their trades. Understanding trade patterns in the past goes a long way to enlighten investors on the risks and opportunity involved with a particular security at the present time and even in the future. A strategy that has a good RSI should be something of worth to every forex trader.

RELATIVE STRENGTH INDEX AND THE FOREX MARKET

In the forex market, the relative strength index is used to indicate temporal overbought and oversold conditions in the market. A condition is said to be overbought when the demand for a certain asset pushes the price of that asset or other related assets to levels that are not justifiable by fundamentals. A condition is said to be oversold when underlying assets fall farther than the level of its true value. Sometimes, the conditions go on for a while, establishing new grounds and breaking new records, other times, they are just temporal.

HOW THE RELATIVE STRENGTH INDEX WORKS

The RSI is in use by quite a large number of people who use it as a technical indicator and oscillator that indicates when a market is overbought or oversold. The market is overbought when the RSI value is over 70, and oversold when the RSI value is less than 30. For a stable market environment, traders should be looking at RSI values somewhere between 30 and 70; anything more or less than that is considered an RSI caution alert. Some traders may want to throw some caution out of the window and go for higher and lesser values of 80 and 20.

FOREX STRATEGIES DEVELOPED WITH THE RSI

A lot of traders have used the RSI to develop their private trading strategies and it has been working for them. Here are some of the strategies developed using the RSI

1.    Moving average convergence divergence

2.    Average directional index (ADX)

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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