RSI Indicator - Relative Strength Index

Indicators

The Indicators are something which indicate what is happening in the market.Indicators help in analyzing the chart.

One among the popular indicator is RSI indicator –

 

Relative strength index

It compares the gain between recent gains and recent loses indicating over brought and over sold indications. It also measure the speed and change of price. The faster the market price speeder the RSI indicator and slower the market price the slower the RSI indicator

The range in RSI is from 0 to 100

If the line reaches 70 then its overbought condition and there is probability that the market can reverse.

If the line reaches 30 then it’s oversold and there is probability that the market can reverse.

Note-

Sometimes even when it reaches 70 (over brought condition) the price keeps going on. If RSI is combined with various indicators it can give more accurate results.

Calculation

The formula for RSI = 100-100/(1+RS)

RS= Average profit/Average loss.

Note - for short period of time RSI is very volatile.

RSI indicates buy signal when it’s above 50 and sell signal when its below 50

RSI can sometimes cause divergence

Divergence –If the price goes in one direction and the Indicator goes in opposite direction it’s called divergence.

Advantages

1. RSI is works good during upward or downward trend along with moving average

2. It can identify over brought or oversold area

3. It can identify divergence

Disadvantage 

1. During strong uptrend or downtrend the market can remain in over brought or oversold area for some time. So it’s necessary to use RSI Indicator along with analyzing support or resistance area. 

 As a beginner we shouldn’t overload the screen with indicator. We should use only those indicators which are valid for us and not depend on indicators for profit. No matter which indicator is used profit can’t be guaranteed. It’s all upon your analyzing the chart.