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Relative Strength Index (RSI)
What is RSI?
The Relative Strength Index, known as “RSI“, is one of the most important and well-known major oscillators in technical analysis and is used to evaluate the overbought or oversold signal in financial markets and to identify support and resistance points to enable traders to make successful and more accurate investments. Relative strength was introduced in 1978 by technical analyst J. Welles Wilder and is still preferred and adopted by most traders around the world in their trading to this day.
In general, the indicator is ratios that represent the balance between the positive and negative performance of the financial instrument during a specific period of time. The relative strength index is a default line with two levels ranging from 0 to 100. Values close to 70 at the upper end and 30 at the lower end are signals of strong momentum. Over a specific period of time, that is, if the indicator line rises to a level above 70, this is an indication that the market is in the overbought area and the chances of a trend reversal are increasing. 50, which is the average value in the event that the price fluctuates between 30 and 70, so it is considered the pivot point from which the price starts.
How is RSI installed?
The RSI indicator will not be added to the chart directly, as is the case with all oscillators, so it is added on a separate frame at the bottom of the chart consisting of two default main lines. The indicator can be added through the MetaTrader5 or MetaTrader4 trading platforms through two methods, as follows:
The first method: Go to the “Address bar“, then click on “Insert” and click on “Indicators“, then click on “Oscillators” and choose “Relative Strength Index” as shown in the picture.
The second method: It can also be added by clicking on the “indicators List” and clicking on “Oscillators” and then selecting “Relative Strength Index” as shown in the picture.
After adding it in one of the two ways, the RSI indicator will appear at the bottom of the chart, as shown in the image.
Is the RSI used with all financial instruments?
In the beginning the RSI was designed in its initial form for stock trading only, as analysts began to evaluate stocks according to different metrics and the RSI emerged in popularity compared to these and other technical and fundamental metrics as they considered it an excellent way to get a fair estimate of the potential of a particular stock, with the passage of Time and when the indicator started to prove its effectiveness, traders started applying it to other financial assets as well.
What is the best RSI strategy?
All strategies make profits if they are understood and applied correctly with sound risk management and not taking risks. The RSI, like any other technical indicator, has weaknesses, so you must build your trading decisions with collecting more than one indicator together, whether it is technical or basic to achieve More realistic and accurate trading signals, where the RSI indicator can be combined with the Alligator indicator or the MACD indicator and other indicators, the combination of the RSI indicator with the moving average and the stochastic oscillators has proven its effectiveness well.
Also, you should always look at a broader time frame instead of focusing on a short-term period because this may skew your analysis and lead to wrong trading decisions that expose your account to a loss, so the time period is usually used 14 days.
It is important to keep in mind that the RSI should not be relied upon as a sole indicator for making investment decisions. It is important to use it in conjunction with other technical and fundamental analysis indicators. The RSI is one of the most important and most used indicators in technical analysis and in conjunction with fundamental analysis can achieve More profitable results and more accurately.
How can the RSI be applied?
You should have some trading experience and knowledge before you decide to use the RSI as you can use our free educational resources such as a demo trading account and check out our tutorials to help you become a better trader.
The demo account is a great place to move to a higher level in trading, where you will be able to learn more about trading, apply various strategies, combine technical indicators together, and choose the most appropriate and best for you before applying them to your real account.
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