- Welles Wilder Jr. is considered by many as one of the fathers of modern financial technical analysis. He has created some of the most used indicators in the world of Forex or binary options, highlighting ATR (Average True Range), parabolic SAR or RSI.
RSI is probably one of the key indicators for trading and there are very few people discussing its effectiveness if used correctly. That is why we are going to learn come more about this oscillatory type indicator.
What is RSI?
RSI is the acronym of Relative Strength Index. It is calculated based on the closure of sessions of the range used for its study. The most usual is to take as reference the closures of the last 14 days.
It measures the strength with which prices go up or down, stablishing values between 0 and 100.
If the obtained value is less than 30 we would be seeing an over selling situation. This means that prices of the studied active have fallen very quickly due to the market’s movement and that the most probable is that there will be a change in the direction of the price, starting to rise shortly.
The lower the value is, the better the buying opportunities will be, since the active would be acquired at its lowest price and its value would raise.
If the value obtained is over 70 we would be facing the exact opposite situation that is an over purchase. The investor’s movements would have pumped up the price of the active producing a warning that the price could start going down.
The highest the value, the better the moment would be to sell, since there will be more probabilities of a price low.
When the value is between 30 and 70 we would be facing neutral values. In any case the RSI must be taken as a warning, never as an absolute indicator of a change of trend, having to make a more profound study to be able to determine in what moment the change in the direction of the prices could happen.
In the case of actives with lateral movement, that is, that don’t have a clear tendency of rise or low, the RSI works very well since normally when an over purchase happens it indicates that it is moment to sell and to buy when it is an oversell.
If the price of the active has a clear tendency , then is advisable to look into other signs such as RSI divergences, that is, the contradictions between trends and the indicator (a very low RSI in an bullish trend, for example)