Profiting with the Relative Strength Index

If you want to be a consistent and profitable trader, then one thing that you definitely need to master are indicators. In terms of trading, technical analysis indicators are your number one tool for determining where and when to place the best trades. If there’s a technical indicator that you should master first, it could just be the relative strength index or RSI for short.

If you don’t know what an indicator is, they’re the foundation of technical analysis in all types of trading, whether stocks, Forex, or otherwise. Indicators are super important because they provide you with tons of valuable information. In case you didn’t know, there are four types of indicators out there. These include trend, volume, momentum, and volatility indicators. In one way or another, they’re all about predicting future price movements based on past and current price movements.

Now, in terms of the RSI or relative strength index, this is a momentum indicator. Today, what we want to do is to take a much closer look at this RSI or relative strength index. For newbie traders who don’t have much experience, it’s a very easy to use indicator that allows for profitable trading with minimal effort. Let’s take a closer look at the relative strength index to see what it tells us, how to use it, and more.

What’s the Relative Strength Index?

Welles Wilder Jr is the man who first created the relative strength index back in 1978, and he shared it with the world in his book, New Concepts in Technical Trading Systems. Since its inception, this has quickly become one of the most popular and useful technical analysis indicators out there. Of course, this is due to the fact that it actually works really well, and is also easy to use.

Of the four types of indicators, the RSI is a great momentum indicator, and it measures how momentous or strong recent price changes were. This is very useful because the relative strength index can be used to figure out if an asset is either oversold or overbought, as well as overvalued or undervalued. It’s all about being able to place trades on upcoming trend reversals.

VISIT ANDREW’S TRADING CHANNEL

What you also need to know here is that the relative strength index is an oscillator. The values that it provides you with range or oscillate between 0 and 100. In this sense, it provides you with actionable info on bearish momentum or the bullish momentum of a stock, currency pair, and everything in between.

Reading and Interpreting the RSI

Knowing what the RSI is helps, but you do of course also need to be able to read and interpret it. If you can’t interpret what this oscillator tells you, then you can’t use it. There are a few very important things that you need to know about interpreting the relative strength index.

Perhaps the most important thing to know is that if the RSI provides you with a reading of 70 or higher, it means that a security is either overvalued or overbought. On the other hand, if the RSI provides you with a reading or 30 or lower, it generally means that an asset is oversold or undervalued.

To put this in different terms, if the relative strength index goes past the horizontal 30 line, then it is a bullish indication, and if it goes below the 70 reference level, then it is usually a bearish sign.

You also need to know that in a trend, the RSI can fall into a range or band. If there is a downtrend happening, and you see that the RSI never reaches 30 or lower, and often rallies to 70 or higher, it’s a strong indication that the current downtrend is weaking and that a reversal into an uptrend is likely. The exact same is true in the other direction, with uptrends turning into downtrends.

If there is a downtrend currently, then the relative strength index usually won’t exceed 70, and will hit that 30 mark quite often, or below. On the flipside of the coin, if there is an uptrend going on, then the RSI will usually stay above 30, and it will hit that 70 mark quite often as well.

Some Limitations to the RSI

The relative strength index does have a couple of small limitations. One of these limitations is that it can be difficult to distinguish false alarms from real reversal signals. For example, sometimes it is the case that a bullish crossover that is followed by a sudden decline is a false reversal.

Moreover, because the RSI is a momentum indicator, it may stay in either overbought or oversold positions for a good amount of time after the momentum has already shifted in the opposite direction. Therefore, the RSI is generally best in markets where an asset alternates between bearish and bullish price movements.

Important Tips for Using the Relative Strength Index

There are plenty of trading strategies that can be used with the relative strength index. There are also plenty of indicators that can be used in combination with it. One of the best tips we can leave you with today is to watch all three of the videos that we have included here. Andrew provides you with plenty of in-depth and actionable info on this technical indicator. Moreover, he also covers some of the best specific trading strategies that work well with the RSI.

Now, if there’s just one thing you take away from today, it’s that the RSI becomes much more reliable when you combine it with support and resistance. Using support and resistance with the relative strength index helps prevent false signals from occurring. It also makes it much easier to identify trend reversals. For example, if an asset is overbought at the 70 line, look for strong levels of resistance to confirm the impending reversal.

The Bottom Line on the Relative Strength Index

When all has been said and done, the relative strength index is indeed one of the most important technical analysis tools for Forex, stocks, and everything in between.

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