The Relative Strength Index (RSI) is a very popular momentum based indicator that is specifically used within technical analysis by market technicians. It measures the speed and magnitude of an instruments most recent price changes to evaluate overbought or oversold conditions in the price. Developed by J.Welles Wilder Jr in the late 70s as a line graph based oscillator.
Why do traders use them?
Traders can use RSI to predict momentum and behaviour of a financial instrument. It helps traders validate trends and trend reversals. Easy to spot whether an instrument is overbought or oversold. It can in some cases support other indicators as well. Finally, we can measure whether momentum is running out of steam by price and the RSI diverging against each other.
RSI are usually plotted at the bottom of the chart so they can compare the line graph with the price action of the instrument it is measuring.
Divergences
One of the most common ways RSI are praised to be used are for spotting divergences. In a bullish trend, when price is extended and forming new higher highs – the intervals between each high may get smaller and shorter as price progresses. The RSI would measure this and start forming lower lows, therefore diverging against the main price action. This would give us an indication that the instrument’s trend is running out of momentum.
Most common settings used
RSI is set to measure the price to the last 14 days of price action with levels set between 30 and 70. RSI above or below this level is considered to be either overbought or oversold.
Here are EWF – we primarily use Elliott Wave to label our charts to provide context of the individual waves. However, we use indicators such as the RSI and the Stochastic indicator to measure momentum. Next week I will be covering the Stochastic indicators.
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Editors’ Picks
EUR/USD stays below 1.0550 after mixed US data
EUR/USD stays under modest bearish pressure and trades below 1.0550 in the American session. Although the US Dollar struggles to gather strength following mixed macroeconomic data releases, the risk-averse market environment doesn't allow the pair to gain traction.
GBP/USD recovers modestly, trades near 1.2650
GBP/USD stabilizes near 1.2650 after falling toward 1.2600 earlier in the day. Nevertheless, the pair struggles to gather bullish momentum as the deepening Russia-Ukraine conflict causes investors to stay away from risk-sensitive assets.
Gold extends gains beyond $2,660 amid rising geopolitical risks
Gold extends its bullish momentum further above $2,660 on Thursday. XAU/USD rises for the fourth straight day, sponsored by geopolitical risks stemming from the worsening Russia-Ukraine war. Markets await comments from Fed policymakers.
BTC hits an all-time high above $97,850, inches away from the $100K mark
Bitcoin hit a new all-time high of $97,852 on Thursday, and the technical outlook suggests a possible continuation of the rally to $100,000. BTC futures have surged past the $100,000 price mark on Deribit, and Lookonchain data shows whales are accumulating.
A new horizon: The economic outlook in a new leadership and policy era
The economic aftershocks of the COVID pandemic, which have dominated the economic landscape over the past few years, are steadily dissipating. These pandemic-induced economic effects are set to be largely supplanted by economic policy changes that are on the horizon in the United States.
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