What Is RSI And Why Is It Important?
Let’s imagine a simple scenario: you would like to make some more money. So does everyone. Yet, there is something that makes you different from everyone else. That is… you plan on actually doing something to earn that so-desired extra money. You analyze your options and decide that the best option you can take is trading. At the very beginning, trading is intimidating. You can often think it is complicated. And the truth is, it can be. You find there are tons of elements you have never heard of that can help you be a successful trader. One of those many things is something called RSI – the Relative Strength Index.
What is RSI?
The Relative Strength Index, best known for its acronym RSI, is an indicator. It is an oscillator, so it moves from one side of the spectrum to the other. So far, we know that the RSI is an indicator and that it is also an oscillator. This oscillator measures the strength of the price. Thus, it measures how quickly the price of an asset rises or falls. All this is measured in a given period of time.
Now, why is the relative strength index so important? Why is the Relative Strength Index one of the most popular indicators? Truth is, it can help us determine how strong an asset is moving in the market.
When you open a chart and choose to have RSI on it, you will see an oscillator in this table. This oscillator ranges from 0 to 100 – the higher it is, the higher the bullish force is. This indicator gets this number by measuring the relation between bullish and bearish movements. After that, the oscillating movement is normalized to fit in a range no greater than 100.
The RSI can provide signals and buys of successful sales. This is why many traders base their strategies on RSI. From RSI, with all its tools and insights, are derived lots of successful strategies.
Calculating the RSI is not as hard as it seems. For the calculation of RSI, we need two different formulas: the first one to calculate the relative strength (RS) and the second one for the RSI itself. To calculate the RS, we average the bullish closes, and the bearish closes. This is all over a specified period ‘n’ of time. After that, this indicator is indexed to 100 – and we have finally gotten our RSI.
How Does RSI Work?
Once we have chosen to have an RSI on our chart, we can see it there. Now, how can we interpret this? Easy. We see that there are two lines, one in 30 and one in 70. Sometimes there’s a third line in 50, which is only referential.
An RSI at or below 30 reflects that the asset is oversold. This means that prices have fallen sharply and the downward movement may be coming to an end. An RSI at or above 70 suggests that the asset is overbought. Euphoria may be the main reason why people are buying, which means that it is time to sell the news before we get a sudden drop. RSI close to 50 means the asset does not have a clear trend – it is better to avoid it until RSI moves either way.
The thing with RSI is much more complex, though. RSI can work on its own – you can draw trends within the oscillators and once the trends are broken, it is time to invest. You can also use it in conjunction with the information in the chart to identify failed swings. You can use it along with other indicators – possibilities are almost endless. Are you going to use it and risk winning some trades?