This indicator measures the strength of upward movement for a certain period of time. How to add RSI to a chart and how to Interpret it?
Technical analysis. We continue to talk about mathematical methods of technical analysis, which help traders to understand the direction of the trend and to notice signals indicating its soon change, based on the calculation of mathematical functions of the price chart values. In the last lesson we started to discuss indicators of the price reverse, or the leading indicators (oscillators), learned how to use the MACD. Today we will study a more complex indicator Relative Strength Index (RSI).
Relative Strength Index measures the strength of the upward movement for a certain period of time.
Video tutorial:
How is RSI calculated
The calculated index is reflected in the form of a small chart at the bottom of the main price chart.
The index is relative, therefore the strength of the upward movement is measured in percentage and has the indices from 0 to 100 %.
Interpretation of RSI
The index helps to determine the overbought and oversold zones, i.e., excessive demand or supply.
Usually these zones are limited to levels of up to 30% for overbought and 70% for oversold.
How do these zones form:
• if at a certain period the price has grown more than 70% of the time, the value of the oscillator rises above 70% and enters the oversold zone, which indicates an excessive demand for the asset;
• similarly, a decrease of the indicator value to the zone from 0 to 30% signals that the price declines for most of the analyzed period, i.e., rapidly, almost without any correction and a rollback is possible in the near future.
RSI, as MACD, allows traders to work with divergence.
Multidirectional lines of minima or maxima on the price chart and on the RSI chart indicate a coming change in the trend direction.
The presence of a divergence is also a signal to buy or sell (see the figure).
How to add RSI to the chart on MetaTrader 4
In «Navigator» find «Indicators» and then «Oscillators», there you will find Relative Strength Index.
Place the following settings:
― period;
― price field (opening, closing, lows, highs).
Place several MAs and follow its behavior.
It is important to practice constantly in the use of this analytical tool.
Our next lesson will be devoted to one more leading indicator — Stochastic Oscillator.