The RSI Indicator

Filed under: Learn Forex Trading |

Screen shot 2013-06-18 at 09.23.01Today, I would like to talk in a little detail about the RSI indicator, as this is one of the few technical indicators that I actually use when analysing the forex markets. This particular indicator was developed by J. Welles Wilder in the 1970s, and is one of the oldest of a multitude of technical indicators that are now included in most trading software and trading platforms. What the indicator does is to compare the gains and losses of a particular market over a certain period. For those of you who like bit of maths, the basic formula for this is:

 

RSI = 100 – (100/(1+RS)), and RS = average gain/average loss

 

However, you can choose the period of data that you are to analyse, with Welles Wilder choosing a 14 day period, which remains the most popular period to analyse, and is in fact set as the default on most trading platforms. This means that the average gain and the average loss over the last 14 days are analysed, and as new data is produced, if the average gain is more than the average loss, then the RSI will rise, and if the average gain is less than the average loss, then the RSI will fall.

 

The RSI is known as an oscillator, as it oscillates between two boundaries, with a maximum of 100 and a minimum of 0 (although it tends to spend most of its time between 70 and 30). A value over 70 can mark overbought conditions, while a value of less than 30 can mark oversold conditions. Personally, I like to use the RSI indicator to spot divergences with price (which is covered in another article). However, you can use it in a number of different ways to assist you with your trading.

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