Standard period settings for RSI is 14 periods, which can be applied to any time best forex book every man. RSI indicator compares the average of up and down closes for a specific period of time.
RSI moving above 50 level — uptrend is confirmed, below 50 — downtrend is confirmed. RSI peaking above 70 level — market is overbought. RSI staying above 70 level — uptrend is running strong. RSI exiting 70 level — downtrend is underway, or at least a correction down is due. Opposite for RSI falling below 30. RSI trend line breakout – early warning about chart trend line breakout. RSI diverging from price on the chart — an early warning of a possible trend change.
Let’s review each of these RSI signals below. Readings above 70 indicate an overbought market, while readings below 30 indicate an oversold market. However, once RSI advances above 70 it is not yet a signal for an immediate Selling, since RSI may stay in overbought area for a long-long time. For example, when RSI goes above 70, Forex traders would prepare to Sell, but the actual trade will take place only when RSI crosses down below 70.
Opposite true for an oversold RSI: once RSI goes below 30, traders wait for the indicator to come out of an oversold area and rise above 30 before placing a Buy order. Forex traders also use 50 level of the RSI indicator, which separates buying forces from selling forces on the market. Certain trading strategies use RSI 50 level to confirm Long and Short entries by looking at a positioning of the RSI in relation to its 50 level. RSI indicator has got another handy feature: Forex traders use RSI to draw trend lines.
While RSI’s trend line stays intact, it confirms that a trend holds well. With RSI trend lines Forex traders are able to receive a much earlier warning about upcoming trend changes since RSI trend lines witness a breakout few candles earlier than chart trend lines. RSI trend lines are especially useful on large time frames. Another way to exploit RSI is to take advantage of RSI divergence signals. When RSI approaches 70 traders watch for a bearish divergence, which occur when actual RSI readings begin to decline while prices continue climbing up.
RSI Divergence suggests that a current momentum is over and traders should look to protect their profits and be ready to trade in the opposite direction. The best way to learn about any indicators is to read original works of their creators. Therefore, let’s turn to the book where J. Failure Swings: Failure swings above 70 or below 30 are very strong indications of a market reversal. Divergence: Although divergence does not occur at every turning point, it does occur at most significant turning points. When divergence begins to show up after a good directional move, this is a very strong indication that a turning point is near.
Divergence is the single most indicative characteristic of the Relative Strength Index. For calculation Downward Price Changes are taken as positive values. Adding to the subject: RSI is also known to form patterns, such as wedges, triangles, double tops and bottoms, head and shoulders etc. Daily charts are perfect to watch these patterns. RSI breakouts from own patterns often happen 1-2 days earlier than price breakouts on the charts, providing an invaluable information to a trader.