What is the RSI indicator?
A Forex RSI system provides a reasonable indication of the state of the market with little effort and can be used with appropriate parameter settings as the sole or combined trading signal as well as a filter and leading indicator. The Relative Strength Index therefore plays a special role in Forex Oscillator Trading. The indicator was developed in the 1970s and has since been used in all markets. The functionality is relatively simple: For the selected time horizon (in the standard settings of most chart programs, eight to 14 periods), the sum of the periodic price gains and the periodic exchange losses is calculated, Both sums are then set in relation to each other. As a result, the indicator measures the intrinsic strength of its trend relative to itself. The difference to simple momentum indicators lies in the broader price base. The RSI system is a relatively straightforward indicator that can make good statements about the constitution of an underlying market with little effort.
Conclusion: Already in the seventies, the RSI system was developed and can be used in any market. It determines the ratio of price gains and losses over a specified period of time, and this tells you something about the intrinsic strength of a trend.
The RSI for each Forex chart software is calculated according to an identical pattern and displayed as a line in a value range from 0 to 100. In the literature, values above 70 are predominantly considered overbought, while values below 30 are considered oversold. At a value of 50, the market is balanced according to this interpretation.An important area of application in Forex Oscillator Trading is the comparison of different currency pairs: traders can open a long position in markets with particularly high RSI values and thus in a long-term position in markets with particularly low values, thus acting counter-cyclically. This approach is easy to implement in an automated trading system. However, the targeted establishment of countercyclical positions based solely on the RSI is not without its risk: in strong trend markets, the RSI, like other oscillators, also often stays in the extreme for a long period of time.
Conclusion: The Relative Strength Index is calculated in the same pattern in every charting program and is displayed in the chart as a line in the value range from 0 to 100. At a value of 50 the market is balanced, at a value below 30 it is considered oversold and at a value above 70 the market is considered overbought. For example, countercyclical trades can be placed using the existing values.