The Relative Strength Indicator, or RSI, is a tool that's easy to understand and very useful in any Forex trading strategy. The RSI is an oscillator based on a time period that can be as short as minutes or as long as month and any time period can be used.
In currency trading, the Relative Strength Indicator shows when the Forex market is either over bought or oversold. The RSI is a very helpful tool for successful Forex trading and one of the most popular signals used by successful traders. The RSI allows the forex trader to gauge the direction in which a particular currency may be moving. The RSI has the advantage of being a leading indicator, and consequently, this indicator shows the trader which way the market has a higher probability of going in the future, allowing the trader to take the appropriate position, whether it is to buy or sell a particular currency pair.
When interpreting the RSI, you should keep in mind that the larger its value, the more over bought the market is. Conversely, the smaller the number, the more oversold the market is.
The Relative Strength Index was first introduced by J. Welles Wilder in the June 1978 issue of Commodities (now known as Futures) magazine, later in his book New Concepts in Technical Trading. The index is designed to follow the momentum of price as an Oscillator that ranges between 0 and 100. The index tracks recent price to itself and is therefore a measure of velocity. Divergences are a common form of interpretation for the Relative Strength Index. When the price of a security diverges from a plot of the Relative Strength Index on that security it gives advance warning of a potential trend reversal.
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Posted by: Online Forex | December 29, 2008 at 01:20 AM