RSI Indicator for Newbies

RSI Indicator for Newbies

If you are planning to become a proficient Forex trader, then something that you need to know all about are indicators. Indicators are the most important tools used in trading Forex, stocks, crypto, and everything in between. One of the most important indicators for you to know is the RSI or Relative Strength Index.

For those of you who don’t know, indicators are the cornerstone of technical price analysis. In other words, indicators provide you with important information about past and current price movements. This should of course provide you with a good idea of what price movements in the near future look like. There are four types of indicators out there. These are trend, momentum, volatility, and volume indicators.

Momentum indicators are some of the most popular and useful, which is what the RSI or relative strength index is. What we want to do today is to provide you with some basic information on what the RSI is, how to use it, what it tells you, and more. Let’s get to it and help you trade using the relative strength index.

RSI

What is the RSI?

Ok, so as we have established by now, RSI stands for relative strength index. This is a special type of indicator that was first developed by J. Welles Wilder Jr, who then introduced it to the world in his 1978 book, New Concepts in Technical Trading Systems. Since then, it has quickly become a super popular technical analysis indicator, and for good reason, because it works.

Now, in terms of the four indicator types, the RSI or relative strength index, is a momentum indicator. In other words, it measures how strong or momentous recent price changes were. This is them used to see if a stock or other asset is overbought or oversold. Of course, if something is overbought or oversold, it provides you with valuable information on how to place a trade.

What you also need to know is that the RSI or relative strength index is displayed as an oscillator. This means that it moves or oscillates between values ranging from 0 to 100. It can therefore provide you with valuable information about the bullish or bearish momentum of an asset.

RSI

How to Interpret the Relative Strength Index

Now that you know what the RSI is and what it tells you, it’s also important for you to know how to interpret and read the relative strength index. Of course, if you cannot interpret what you see, then you cannot use it to place profitable trades. In order to use the relative strength index properly, there are just a few important things that you need to know.

So, when the RSI goes past the horizontal 30 level, it is generally a bullish sign, and when it goes below the 70 reference level, it is generally a bearish sign. To put it in simpler terms, if the RSI provides you with a reading of 30 or below, it is an indication that an asset is oversold and/or undervalued. When the relative strength index provides you with a reading of 70 or above, then an asset is becoming overvalued and/or overbought.

VISIT ANDREW’S TRADING CHANNEL

What you also need to know is that during a trend, the RSI can fall into a range or band. When there is an uptrend going on, the relative strength index will stay above 30 and should hit 70 quite often. If there is a downtrend in the works, the RSI should usually never exceed 70, and will often hit the 30 mark, or well below 30.

To provide you with an example, if there is a downtrend, and you see that the RSI does not reach 30 or below, and then also rallies at 70 or higher, it means that a downtrend has weakened and will likely reverse into an uptrend. The exact opposite is the case with an uptrend. Keep in mind that using both moving averages and trend lines is important when using the relative strength index indicator in this manner.

Drawbacks of the RSI

Just like any and every indicator out there, the RSI does also have some limitations that you will be faced with. The biggest issue with the relative strength index is that it can be difficult to separate false alarms and true reversal signals. To provide you with an example, a bullish crossover followed by a sudden decline in stock is a false signal.

What you also need to be aware of is that since this is a momentum indicator, it can stay in the oversold or overbought positions for quite some time after an asset has already achieved significant momentum in the opposite direction. For this reason, the RSI is usually the most useful in an oscillating market where an asset is alternative between bearish and bullish price movements.

Using the Relative Strength Index to Place Trades

Alright, so the fact of the matter is that there are many ways to trade with the RSI. Moreover, there are also many other indicators that you can use along with it. Now, we do really recommend watching the tutorial video that we have included here, because it provides you with perfect guidelines on how to use the RSI.

That said, the most important takeaway from this video is that you want to use support and resistance along with the relative strength index. This will help prevent false reversal signals from occurring, and it will also help you spot those reversal much easier.

For instance, if you see that an asset is undersold at the 30 line on the RSI, then you also want to look for major support lines. These support lines will indicate that a trend reversal is on the horizon and that an uptrend could soon begin. The same goes in the other direction.

Trading with the RSI – Final Thoughts

There you have it people, all of the basics that you need to know about this awesome RSI indicator. We definitely recommend watching all of the videos that we have included here today. Andrew does a great job at explaining exactly how to use the RSI indicator in a variety of ways.

If you need help day trading, and what you need is a comprehensive education, particularly on Forex trading, then the best place to be is the Income Mentor Box Day Trading Academy. At this time, the IMB Academy is the most comprehensive, user friendly, effective, and affordable Forex trading school out there.  

CLICK BELOW TO JOIN INCOME MENTOR BOX AND START MAKING REAL PROFITS! 

Trading with the RSI Indicator

Trading with the RSI Indicator

If you are just getting into the world of trading then one of the most important things that you need to be able to master are indicators. When it comes to trading, indicators are extremely useful tools that can provide you with many different types of information. Ultimately, these indicators help you place the most profitable trades possible. What we’re here to talk about today is trading with the RSI indicator. The RSI Indicator is indeed one of the most popular and useful indicators out there.

Now, the fact of the matter is that although the RSI indicator is extremely useful and fairly easy to use, many people actually get it wrong. What we are here to do today is take a much closer look at the RSI indicator to see exactly what type of information it provides you with and how to use it. We also want to take a look at a big mistake that many traders make when using this RSI indicator, and how to avoid this mistake. We’re also going to provide you with many other useful tips for trading with the RSI indicator that you need in order to be successful.

What is the RSI Indicator?

The RSI indicator stands for the relative strength index. Now, in terms of what type of indicator it is, this is a momentum indicator. It was first created by a man named J. Welles Wilder. What you need to know here is that for this particular indicator is designed to measure the momentum or the speed of a price movement.

Some people might refer to this indicator as an oscillator because it oscillates between 0 and 100. What it means here is that the faster a price goes up, the higher that RSI value will be, and the other way around. In case you are wondering what the formula for calculating the RSI is, it is the following.

100 – 100/[1 + RS]

Keep in mind that for this formula, RS stands for the average gain/average loss.

RSI Indicator

How it Works

As you can see, the formula for the RSI indicator is actually fairly simple. We only slightly confusing thing might be the RSI calculation, which is of course the average gain divided by the average loss. What is important to note here is that the RSI indicator will go up when the average gain is very large, or when the average loss is very small.

Something that isn’t course important for you to know is how the value of the average gain goes up, and this is actually quite simple, so when the price of a security moves upwards very quickly and there are little or no pullbacks, the average gain is going to be very large because that price is making positive gains and that leads to a higher RSI value.

On the flip side of the coin, if the price falls very quickly and there are little or no pullbacks, the average loss is going to be very large because the price is making negative gains, and that leads to a lower RSI value. What is also very important to note is that both the average gain and the average loss can be easily manipulated by changing the settings of the relative strength index indicator. For instance, if you use a five period RSI, then the average gain, an average loss will both be based on the last five candles.

Therefore, what is important for you to know here is that the lower your RSI setting periods are, the more sensitive the indicator will be to recent price movements. Moreover, if you use a longer time period for the relative strength index, then the price will not be as sensitive to the motions and movements.

RSI Indicator

The RSI Mistake that Many Make

Something else that is important for you to know is that when the relative strength index is below 30, an asset is considered to be oversold. If the relative strength index is over 70, then an asset is considered overbought. So when the RSI indicates that an insecurity is oversold, many people think that the market can’t possibly go any lower, so they hit the buy button and go along.

Well, this can actually be a big mistake. This is because the RSI indicator actually measures the momentum of a market. It’s important to note that the RSI, if it is oversold, it signals that there is a strong bearish momentum, and if it is overbought then there is a strong bullish momentum.

Therefore, the big mistake that many traders make is blindly making a buy trade because there is strong bearish momentum or many people also hit the sell button because of the price seems way too high. The bottom line here is that don’t make the mistake of buying a security just because the RSI says that it is oversold, because the bottom line is that it can always be more oversold.

Using the Relative Strength Index to Win Trades

Technically speaking, the relative strength index indicator measures the average gain to loss ratio over a certain period of time to help determine the momentum in a market. A simple example of this is that if the relative strength index is above 50, it means that the average gain is greater than the average loss. So how exactly can you use the RSI indicator to help you win trades? Well, the bottom line is that the RSI indicator makes for an awesome trend filter that will provide you with information on whether you should buy or sell. Follow the examples as listed below in order to place the best profitable trades.

  1. A great idea is to adjust the period you are 200. So, you can easily identify the average gain versus the average loss over a very long period of time.
  2. If you see that the 200. Relative strength index is over 50, then the market is very likely in an uptrend, so you want to place buy trades, and on the other hand if the RSI is below 50, then the market is likely trending downwards, which means that you want to place sell trades.

RSI Indicator

Bottom Line on the RSI Indicator

Although there is of course a lot more information about the relative strength index, or RSI indicator, that you need to know, the bottom line is that we have provided you with a basic foundation of knowledge that you should be able to build upon. Keep in mind that the RSI indicator is one of the bold best momentum indicators out there, and it can help you enter trades with great confidence.

Remember folks, if you need help day trading, and what you need is a comprehensive education, particularly on Forex trading, then the best place to be is the Income Mentor Box Day Trading Academy. At this time, the IMB Academy is the most comprehensive, user friendly, effective, and affordable Forex trading school out there.  

CLICK BELOW TO JOIN INCOME MENTOR BOX AND START MAKING REAL PROFITS!