Knowledge of current economic events is a fundamental element of effective trading. In the case of currency pairs and indices, the ability to use the calendar is already satisfactory. Nevertheless, to assess market sentiment, it is worth following current events. In the case of instruments such as shares, tracking information from companies is a necessity.
Relative Strength Index (RSI): Analysis, Calculation, and Trading Application
Introduction to RSI
Relative Strength Index (RSI) is a popular technical analysis indicator used to evaluate the strength or weakness of a financial asset based on its recent price movements. Developed by J. Welles Wilder, it is classified as an oscillator, meaning its values oscillate within a fixed range (from 0 to 100).
Purpose of RSI
RSI is used to identify overbought or oversold conditions in a market, which can indicate potential trend reversals. This oscillator is particularly useful for predicting turning points and assessing whether an asset is excessively bought or sold.
How to Calculate RSI
The calculation of RSI involves several steps:
Measurement Period: The standard period for calculating RSI is 14 days, but it can be adjusted based on the analyst's preference.
Gains and Losses: Calculate the average gain and average loss over the specified period.
Relative Strength (RS): Calculate RS as the ratio of the average gain to the average loss.
RSI: Based on RS, calculate RSI using the following formula:
For example, if the average gain is 1.5 and the average loss is 0.5, RS is 3. Therefore, the RSI is:
Trading Based on RSI
Overbought and Oversold Conditions:
RSI above…
