Both are of equal weighting as far as resistance levels go, though the upper barrier boasted additional confluence by way of an RSI bearish regular divergence signal within overbought territory. As a result of this, not only did we have a solid resistance level in play on the candles, the RSI exhibited a clear indication this market was likely weakening. The best form of technical analysis will always be what suits YOUR trading style and personality. The RSI momentum indicator, as demonstrated in this article, has a multitude of uses which could benefit your trading.
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By IC Markets. Apr 24 19, GMT. In general, that is what the rsi indicator buy and sell signals are based on. Step 1. The relative strength index calculates the range of the positive U and the negative D change in the price.
Relative Strength Index (RSI) Indicator for Day Trading: How to
I will explain the relative strength index formula below. Price i is the close price of the current period i. One of the sources gives a simplified formula: RS Relative strength is the ratio of the average gain to the average loss. This is one of the most common calculation formulas, but not the only one. For example, in adapted versions of the RSI indicator formula, the price change is smoothed using Exponential Moving Averages. Note 1: If you use an SMA in the formula. If the trend is steadily rising, without a single down candlestick for the period written in the indicator settings, the D value in the RS denominator will be 0.
Since you cannot divide by 0, the oscillator value is considered to be Note 2: The above formula describes the general principle of the index calculation, it is not a constant. According to it, when the period is 2 for an uptrend, the index value must be The actual value in the screenshot below is If you want to explore the formula and understand in more detail, and you know the MGL programming language, you can open the code.
It will open in Word. I have prepared the relative strength Calculator template for technical analysis. The Excel file includes an algorithm for calculating the Relative Strength Index, you can also draw diagrams using the RSI values you enter. You can download the RSI calculation excel Sheet here. It is a little more difficult with the modifications.
You have to set them up onto the trading platform yourself. Moreover, the indicator code must be compatible with the trading terminal code. If you want to download a modified version, let me know in the comments section. I will write to you where you can get working templates. In your profile, open the trading chart of any currency pair. It will appear under the price chart. To see the custom window, click on the corresponding icon marked with the arrow on the screenshot below. In MT4, you install and configure the Relative Strength Index in a slightly different way from the same procedure for the LiteForex trading terminal, but the general principle is similar.
In MT4, you install and configure the indicator in a way that is a little different from the same procedure for the LiteForex trading terminal, but the general principle is similar. You can set the parameters of the level in this tab: the RSI values, the color, and the style of the lines. A good option is setting additional levels using the Add button. This tab allows you to set the indicator visualization on all timeframes or some of them.
You go to the Insert menu and open the Indicators tab. The properties window has a few differences:. To sum up, there are hardly any differences between the MT4 and MT5 platforms concerning the installation and customization of the oscillator. At these moments, the index is in the overbought or oversold zones.
How to Trade Using RSI
The strategy implies that you should wait until the index line reverses in the overbought zone and enter a short trade, according to some additional signals. The same is relevant for entering a long trade when the indicator turns in the oversold zone. I will also give you real-life examples. Important: The Relative Strength Index indicator features common flaws. The signals are lagging, and the indicator repaints. So, the tool mostly serves as an additional confirming tool to supplement trend indicators, technical patterns, etc.
Detailed Explanation of RSI
Do not enter trades based only on the oscillator signals. It is clear from the screenshot that the price lows coincide with the reference points of the price relative strength at the level of Note that the line breaks through the resistance level earlier than the price actually reverses, signaling the breakout in advance. A sell signal is sent when the oscillator breaks out the level built according to the reference points; it is level 28 in our example.
Another example, taken from the MT4. The MT4 chart is sometimes more convenient to study historical data. The thin red ovals mark the reference points of the indicator coinciding with level When the indicator breaks through level 30, there is a trading signal. It is an early signal. According to graphical analysis, the entry would be at the point marked with the green circle. The relative strength index overbought oversold levels are the signal levels, whose default parameters are 30 and When the index line goes beyond these levels, it means that the market is overbought or oversold.
When the indicator line reverses in these zones, it could signal the change in the trend direction or a deep correction. However, the trend may go sideways, as in the figures below.
Relative Strength Index (RSI) Defined and Explained
The first turned out to be weak, although ultimately, the pullback would not have triggered the stop,, and the trade would have yielded a profit. The second one is a perfect trade signal.
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The third is false. The fourth is true but weak. Do not strictly follow the default levels parameters of 30 and Move this level to your trading chart timeframe, revise the level values every bars. So, we refer to only the overbought level 76 suits. We set 76 in the customs and go to the working timeframe. The trades are entered according to the same principle. The indicator should break through the strong level when it goes outside the overbought oversold zones.
Divergence occurs when the indicator and the price chart go in opposite directions due to lagging. The Relative Strength Index is a leading indicator, so the price chart is usually lagging. If the price chart continues the trend, and the signal line has reversed, it is divergence.