Relative Strength Index is a technical analysis tool that is an important part of a forex trader’s toolkit. It helps traders to make the right decisions on how and when to enter or exit potential trade positions.
The RSI as it is popularly known falls in the category of technical analysis tools known as oscillators. As such it indicates the movement of price and market. These are important factors for traders to consider before they take a position on trade.
The Relative Strength index enables traders to profit in their trading in the following ways.
Helps Traders Identify Overbought And Oversold Positions
When the market is overbought, it means that the price of the currency pair of interest is high. It also means that there’s a high likelihood for the market to turn. As a trader, you can wait for the turn so that you can set up a trade, buy and make a profit when the price is at its lowest.
Oversold positions indicate that the price of currency pair is at its lowest and is ripe for a turn. The trader can then get in on the asset and expect an upward price movement which enables them to make a profit when they sell.
The RSI is among the many indicators on a forex traders analysis and trading platform. It presents at the bottom of the screen as a line scaled from 0 to 100. When readings are above 70, it indicates an overbought market. Readings above 30 indicate an oversold market.
Helps To Determine The Trend In The Market
Trends are some of the major profit drivers for forex traders. When a trader identifies a trend movement in the price of a currency pair, they can make their trade and set a take profit level in the direction of the trend. If the trend continues, the trader will make a profit as predicted.
There are many tools that a trader can use to identify a trend movement. The RSI is one of the tools that you can use to confirm the presence of a trend in the market.
To confirm an uptrend, make sure that the reading on the RSI line is above 50. For a downtrend, the RSI reading is below 50. Sometimes, you may have to wait for the reading to fall or rise further to confirm the presence of a trend.
Measure The Strength Of Any Price Changes In The Market
As its name suggests, the RSI measures how strong a price movement in the market is. The result provided by the RSI is based on the historical price movement of the currency pair of interest. A high or low value on the RSI results indicates that you can trade in the direction of the price movement confidently.
RSI reflects the momentum of the market. Thus, you can get a feel of the movement of the price and make the correct trading decision.
Helps To Measure Divergence
Normally, the RSI is a leading indicator. This means that you have to use other analysis tools to confirm what the RSI is predicting. As a trader, relying on one analysis tool may cause you to get into a loss rather than a profit even when its prediction is correct. As a leading indicator, the RSI may offer false predictions that need to be confirmed with other tools.
Divergence occurs when there is a change in price that is not supported by the market. You have a divergence when there is a change in price that is not supported by your indicator. Divergences may indicate that the trend is about to turn.
A bullish RSI divergence occurs when the price is decreasing but the RSI line is increasing. It is used to mark the end of a downward price trend.
A bearish divergence is when the price increases while the RSI line increases. As a trader, this indicates that the price of your currency pair is about to rise.
The Relative Strength Index is considered the best indicator a trader can use. It is easy to read and to make decisions from it. Use it with other trading tools for the most profitable predictions of your forex trading career.