How does Relative Strength Index work ?

February 15, 2019 by Forex guru

Relative Strength Index – RSI

What is Relative Strength Index ?

Short note on relative strength index: Relative strength index is technical indicator which compares current and historical gains and losses in order to define if the asset’s value is over priced or under priced. Formula for calculating RSI is:

RSI = 100 – 100/(1 + RS*)
RS = Average of x days’ up closes / Average of x days’ down closes
Relative strength index math:

Main role of this indicator is to remove noise in price movement representation. High relative strength index success rate we can see in application very often.
Example of GBPUSD chart – RSI indicator is red:

what does the relative strength index tell you ? Interval in which RSI ranges is from 0 to 100 and it shows if asset is overvalued or undervalued (relative strength index law). In fact, as the RSI closes to level 70, the asset can be considered overvalued and has a big chance to be overbought. On the other hand, when RSI reaches level 30 the asset is deemed to be oversold. The best way to use this index is as a additional information to other stock-picking tools because using only RSI trader can create false buy and sell signals which can mislead observer.

History of relative strength index

The relative strength index was developed by J. Welles Wilder and published in a 1978 book, New Concepts in Technical Trading Systems, and in Commodities magazine (now Futures magazine) in the June 1978 issue.It has become one of the most popular oscillator indices.The RSI compares bullish and bearish price momentum plotted against the graph of an asset’s price. Wilder developed Average True Range, the Relative Strength Index (RSI), Average Directional Index, and the Parabolic SAR.

Relative strength index algorithm – How to calculate relative strength index in excel ?

I always get information from MetaTrader. So how to calculate relative strength index using excel manually ? The most simple method we can see in nice post Calculation of RSI using EXCEL.
Idea is to define close price in some time period and than start relative strength index calculation excel :

“Column E” has all closing prices.
“Column F” calculates change in price by subtracting current row from previous row.
If “Column F” value is greater than zero, value will be copied to Column G. If value is less than zero, value will be copied to “Column H”.
“Column I” calculates the average Gain over the specified period, example 14.
“Column J” calculates the average Losses over the specified period, example 14.
“Column K” calculates the value of Relative Strength (RS).
“Column L” calculates the value of Relative Strength Index(RSI).
Please visit website and download relative strength index in excel tool: Download relative strength index formula excel

You can see in this nice video relative strength index example calculation:

How we can trade using this RSI indicator – advantages of using relative strength index ?

How does relative strength index work ? We can use RSI to determine overbought and oversold moment in trading. Below 30 is oversold and above 70 is overbought.There are some rules for traders :
– Market can be oversold or overbought very long time. It is not smart to trade sell orders above 70 and buy orders below 30 without deep analysis.
– Do not buy in oversold market or sell in overbought market without some conformation in your direction (for example some big move, strong bullish or bearish candle etc.)
– The best strategy is – buy or sell after pullback and respect main trend. For example if trend is bullish on daily or H4 chart, price is above 50 RSI in strong bullish direction you can buy if price goes in oversold area on 5 minute or 30 minutes chart. See images below :

On daily chart we see bearish trend. Next 7 days price will fall 300 pips down :

2) We can use RSI indicator to find divergence and predict change of the trend.On image below we can see relative strength index bullish divergence (relative strength index when to buy) :

On this image below we have relative strength index bearish divergence (relative strength index weakness) example:

Using RSI trend lines we can avoid very often false breakout in trading or Market Has Hit an Extreme.How important are levels 30 and 70 (relative strength index bloomberg example), we can see in nice highest rsi table. In this article we can see opinion “Many technical traders view anything above 70 as a sign that the dollar is overbought and due for a correction.”

3) My favorite way to use RSI – draw trend lines on RSI chart and use for trading !
Traders can draw trend lines below and above RSI line. If price breaks trendline than trend will change. See example :

This example shows bullish trend on 30 min chart.I can make buy orders above trendline but if price breaks RSI trendline than trend is changed.Of course on 30 minute chart we can see 25% from ATR bearish trend in price breaks this line (around 20 pips).If price breaks daily trendline RSI that can give few hunderds pips profit.

Questions and answers from email messages:

1) How to find relative strength index indicator in Metatrader ?
RSI is major indicator. It is in indicator section in group oscillators.

2. What is a good relative strength index number
Each number in RSI is “good”. It is just strength index. For example is price is above 70 or below 30 it can be excellent trend which can give more profit in future. Price around 50 can be in range market, but it can be strong trend decline or rise if we have strong divergence in that moment.

3. Should I set RSI settings on different way.Is it better rsi 8 or 14; rsi 7 vs rsi 14 ?
My advice is to use default settings. All major world traders use (mostly) the same settings so they will make decision based on default parameters.Summary, default settings is relative strength index best settings.

4. What are relative strength index disadvantages and what are advantages of using relative strength index ?
The biggest advantage is simplicity, easy reading as we see in chapter how relative strength index works. One of the biggest disadvantage is that rsi is very fast indicator and sometimes we need to wait for higher time frame price close conformation.

RMI indicator Review – free download

October 17, 2014 by Forex guru

RMI indicators were introduced by Roger Altman when in February of 1993 it was introduced in a magazine called “Technical Analysis of Stocks & Commodities”. Improving the data that the classic RSI indicator gives – if the price reaches the area of over sale/overbuy – is the main usage of this indicator.

The formula for calculating this indicator goes as follows: RMI= 100x N/(H+B), where N is the number of days; H is the sum of fluctuations of positive closing prices for the period between “today” and “N days ago” and the B is the sum of fluctuations of negative closing prices for the period between “today” and “N days ago”.

As this RMI indicator is a classical oscillator of the technical analysis, it makes possible for a user to recognize certain possibilities that can be used in trading. When, in the case of downtrend, the indicator surpasses 70%, the signal for the possibility of further downtrend is being sent. The RMI indicator will signal the overselling and when it reaches its high, the chance of declining appears.

In the case of uptrend, when the indicator surpasses the level of 30%, the signal of reaching of the end of the price correcting, so the uptrend can start. In this case, the thing to do is buying the assets.
There is an option for the RMI indicator to form the price patterns in the form of graphs that the traders can take into consideration.

This indicator can also enable the user to watch the signals of convergence/divergence and compare it with the movement of the price. Before forming a decision, it is important to watch the signals.

My usage:
I use this indicator very often.I use m30 and H4 timeframe at most. Red color describe bearish or bullish trend, blue overbought or oversold. When I define trend on H4 or daily chart, make analysis then I go to M30 chart and I wait that blue color go into red and than I buy or sell.

Example :
Trend is bullish. You want to buy afther pullback.You wait that price touch Pivot point or support and you do not buy on support. You wait that blue RMI indicator line goes in red and than buy.

Download RMI indicator free :
This free indicator you can download from instaforex site. Download RMI indicator
Download location : https://www.instaforex.com/downloads/indicators/instaforex_rmi.zip

Fibonacci Numbers and the Golden Ratio – Advice for Forex Trading Profits

October 24, 2012 by Forex guru

In this review, I am going to discuss the background and history of Fibonacci numbers, and I will put the spotlight on The Golden ratio. After doing this, I will additional move to emphasize three tips associated to the money administration which are made to help you in increasing your revenue.
Exit and entry points are extremely important in the Foreign exchange trading. To fully understand them in the appropriate way, a deal must be aware of resistance and support levels. Percentage retrenchment levels from Fibonacci that build on the theme of the number sequence system of Fibonacci, and the Golden ratio are vital for traders in the Forex community.

Right, let’s learn this lingo.

What are the golden ratio and Fibonacci numbers?

The Fibonacci sequence was first found in the book produced by Leonardo Fibonacci long ago in the year 1202. The book in fact detailed the Arabic-Hindu numerical problems with an answer.
The exact problem that was described in the book was “from one pair, how many rabbits can be produced.” If a pair delivers a new pair every 30 days, then the productivity level can be improved.

The Golden Ratio

After the opening, few numbers in the Fibonacci series, the ratio that will appear after every greater number will equivalent to .618, whilst the lowest number will be 1.618. These two important numbers are known as the Golden ratio.
The proportions of this ratio are pretty interesting and valuable for the sensory faculties of the human beings, and it has been seen in music, art, biology, and architecture. For instance, galaxies, sunflowers, molecules, and hurricanes are examples of the golden ratio.

Considerable Retrenchment Levels

38.2% and 62.8% are the most important retrenchment levels. Together with these, you will find a few other important values like 33%, 75%, and 50%.
Listed below are the top three tips for earning money with Fibonacci numbers:

1. Fibonacci shows us how to stop loss levels

Any trader can apply these numbers to make a stop loss level. For example, if at least, three price levels of Fibonacci numbers appear with a different and tight spot, then a dealer can put a stop loss either under or above the spot to settle down things.
The Fibonacci numbers can also help the dealer even if they aren’t in the right spot, if they have messed up the support area, then they can close up and change the price.

In this video you can learn everything about Fibonacci levels in forex trading:

2. Position size is determined by the Fibonacci

Position size can also be determined by the Fibonacci which also relies on the level of risk you take in your deal. For example, if the prices are exactly on a required level, then at that time you would probably wish to have multiple positions that could move your price further.

3. Targets are defined by Fibonacci

In Fibonacci numbers, when the pattern has finished in a price zone then you can take advantage of it to make profit. This objective will assist the traders in being analytical in their strategy.