What is the RSI – Relative Strength Index
RSI – Relative strength index simplified
Is a momentum strength indicator which was published by J. Welles Wilder.
The indicator use is to analyze different assets in the financial markets,
The RSI is mainly used in order to recognize deviations of overbought and oversold scenarios in trading/price of an asset.
The recognition of an overbought or oversold scenarios is pretty simple
However each trader define overbought and oversold scenarios differently.
Here is an example:
As you can see in the chart there are two lines which represents the overbought and the over sold points.
The meaning is that once the blue line will cross the upper line we are in an oversold scenario and once we cross the underline we are in an oversold scenario.
RSI – My Way.
I am using the RSI for ages,
This is one of the best and simplest indicator you can use.
Simplicity is very important when it comes to trading the stock market,
Therefore I highly advise you to stick to few indicators and to minimize the search after indicator once you have a system which works.
Since the indicator is calculating a rise or a drop in the average of a chosen instrument based on a chosen number of days therefore we can edit two main things in the indicator which will provide us with different result once we use it.
We can change the number of days and we can change the overbought and oversold lines,
Taking the RSI number will provide you with less scenarios since we are measuring a wider time frame.
The same will happened by taking the upper line and the underline,
Taking the upper line up will create less overbought scenarios and taking the underline down will provide us with less oversold scenarios.
The RSI most of the times comes with the same default parameters,
The time period is normally 14 the upper line is 70 or 80 and the underline is 20 or 30
I found it the best to use the RSI indicator with the default parameters:
Upper line: 80
Having said that I am using the RSI indicator only as a deviation indicator and I am not placing any trades which are only based on the RSI itself as a result of any give scenario.
Advanced Relative Strength Index
The simple Relative Strength Index is exactly as it sounds,
A simple Relative Strength Index indicator is based on the same formula and can be found in any free or payed platform you are trading with.
However there are some advanced Relative Strength Index indicators which can highly improve your risk reward compared to the simple RSI.
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