Relative Strength Index Indicator Trading Guide
Relative Strength Index Indicator Trading Guide
If you are just starting off in the world of trading, whether it be forex, cryptocurrencies, the stock market or anything in between, one of the most important things that you need to master are indicators. Now, when it comes to one of the most useful and simple to use indicators out there, the relative strength index indicator is absolutely one of the best.
The relative strength index indicator is indeed one of the most useful momentum indicators around, and they can definitely help you win trades. With all of that being said, although this RSI indicator is quite easy to use, many people actually make some fundamental mistakes with it.
Today we want to provide you with an in depth relative strength index indicator trading guide to provide you with all the information that you need to know about it in order to use it to place profitable trades. We want to examine what type of information is indicated, provides you with as well as one of the biggest mistakes that people make when using it. We also have many other useful tips for using this relative strength index indicator so you can be a profitable trader.
What is the Relative Strength Index Indicator?
Just in case you didn’t know, the relative strength index indicator can also be shortened down to just RSI. The relative strength index indicator is a momentum indicator, and it was first created by a man by the name of J. Welles Wilder.
Perhaps the most important piece of information that you need to know right now is that this is a momentum indicator that can provide you with information about the speed of a price movement or a trend. In other words, they can provide you with information in terms of how strong a trend is.
Many people called the RSI indicator an oscillator, which is because it often oscillates between values of zero and 100. What this all means is that if the value of the RSI is very high, then the price is going up fast. If the price is going up slowly than the value of the RSI is going to be low. Take a look below to see what the formula for calculating the relative strength index indicator is.
100 – 100/[1 + RS]
Just remember that when it comes to this formula, RS stands for the average gain divided by the average loss.
How the RSI Works
Now, although the formula for this RSI indicator is actually quite simple, there is one slightly confusing thing about it. The only slightly confusing thing about this calculation is what the IRS is. Or in other words, the average gain and the average loss. You need to know that when the RSI indicator is high, then the average gain is very large. The RSI indicator will also go up when the average loss is quite small.
It is also important for you to know how the value of this average gain goes up. When the price of an asset goes up very quickly and there are either no or little pullbacks, then the average game is going to be quite large because the price is making positive gains and that means that there is a high RSI value.
On the other hand, if a price of a security goes down very quickly, and there are either no or little pullbacks, then the average loss is going to be very big because the price is making negative gains, which then leads to an overall lower RSI value.
What you also need to know is that both the average loss and the average gain can be easily manipulated by altering the settings of the relative strength index indicator. For instance, if you use a 14. Relative strength index, then the average gain and the average loss will both be based on the last 14 candles. The most important thing for you to know here is the fact that the lower your RSI. Settings are, the more sensitive this indicator will be to the most recent price movements of an asset. However, if you use larger time friends then the price will not be quite as sensitive to the most recent movements.
A Big Mistake with the Relative Strength Index
OK, so in terms of reading the relative strength index indicator, what you need to know is that if it shows you a value that is over 70, then an asset is considered overbought. However, if the value shown to you is below 30 then an asset is considered to be oversold. Therefore, if an asset shows an RSI value under 30, than most people are automatically going to place a cell trade
. This is actually a huge mistake because the RSI indicator is a tool that measures the momentum of a market. Now, when the RSI is oversold, it is of course a signal that there is strong bearish momentum in the market, and if it shows you an overbought value it means that there is strong bullish momentum.
However, the biggest mistake here is that traders will blindly place a sell trade when there is strong bullish momentum or vice versa. The most important tip for you to take away today is that don’t make the mistake of selling a security just because the RSI says that it is overbought. An asset can always be more overbought or oversold, so you do need to use other tools in conjunction in order to place the most profitable trades.
Winning Trades with the RSI
What you need to know here is that ultimately the relative strength index indicator measures the average gain to average loss over a certain period of time, which therefore helps you determine the momentum of the market. The bottom line here is that if the RSI is over 50, that means that the average gain is greater than monthly average loss, and vice versa.
This relative strength index indicator is an awesome trend filter that helps you determine whether you should place, sell or buy trades. Something that you should try doing here is to adjust the periods to 200 so you can easily identify this average gain versus average loss ratio over a long period of time. If you see that the RSI is over 50 when using a 200. Then the market is in an uptrend and it is best if you place buy trades and vice versa.
Final Thoughts on the Relative Strength Index Indicator
As you can see, the relative strength index indicator is definitely an extremely useful tool that you absolutely need to master if you plan on being successful in trading. We definitely recommend watching the RSI indicator video that we have included here today. Of course, there is always more to learn about an indicator like this, but we think that we have provided you with a good basic foundation of knowledge that you can then build upon to become one heck of a profitable trader.
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