The Relative Strength Index

The Relative Strength Index explained by professional Forex trading experts the “The Relative Strength Index” FX trading team.

The Relative Strength Index?

One of the first indicators that most new traders get introduced to when discovering the world of Technical Analysis is RSI, or ‘The Relative Strength,’ index.

RSI is classified as ‘a momentum oscillator that measures speed and change of price movements.’

But what does that really mean?
RSI was developed by engineer, mathematician, and trader J. Welles Wilder, presented in his ground-breaking work “New Concepts in Technical Trading Systems.”

At the time, Mr. Wilder was a stock and commodities trader that was met with the problem that can be paraphrased along the lines of: “Even though the trend is strong to the upside, how do I know price isn’t TOO expensive for a long position?” Or we can take the same type of statement to the opposite direction: “If the trend is strong to the downside, how do I know price isn’t TOO cheap?”

As traders, many of us have been there before. Take Gold for instance. This is a trend that’s taken place for the better part of 9 years, watching Gold go from less than $300 per ounce to current levels around the $1800 marker.
While the above chart confirms the strong trend to the upside and the potential bias for buy positions, it should also highlight how blindly buying in up-trends could be a tough strategy for traders.

So – I know that it’s not enough to simply buy up-trends, or to simply sell down-trends (even for one of the strongest trends in the world over the past 10 years); how am I going to enter into trades?

This is one of the areas where the Relative Strength Index can help. RSI will grade the price movement exhibited between candles for the last X periods (with x being the input used by the trader, commonly 14 with RSI).

As price changes, RSI will register these changes in price – relative to previous price movements – in an effort to show us ‘strength.’

Higher values on RSI will generally denote Bullishness, and lower values will generally show Bearishness.

Oscillators are often set to boundaries between 0 and 100. Below you will see a diagram of RSI with the lower boundary of zero, and the upper boundary of 100. In this example, I’m using the default input period of 14 (which is the most common input period used with RSI).

The Relative Strength Index Conclusion

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