Hello, forex traders are friends!
Today we will talk about one of the oldest classical indicators, RSI (relative strength index or abbreviated RSI ).This indicator includes all trading platforms, it is used in thousands of trading systems in any market.Every trader knows this light, but nevertheless not everyone is able to use it correctly.That is why in this article I will try to put all the features of the application of this wonderful display, and share an expanded version.
Features indicator RSI
Platform: the Metatrader 4
Currency pairs: any
indicator Type: Oscillator
trade time depends on your
strategy Featured DC: Alpari, Forex4you
indicator was developed by Welles Wilder (J. Welles Wilder) and published in Commodities magazine in June 1978.Later, Wilder wrote the book "New concepts in trading systems", which set out in detail the essence of the relative strength index.After the publication of the book, the RSI oscillator has become very popular among
Welles Wilder - stock trader, one of the leading experts of the technical analysis and the developer of the plurality of trading systems and indicators.Educated Wilder engineer, and has worked in the specialty, and the real estate market, but really became interested in futures trading.For many years, Wilder was engaged in research of technical analysis, the results of which became several books ( "New concepts in technical trading» (New Concepts in Technical Trading, 1978), "Market theory of Adam» (The Adam Theory of the Markets, 1987)and "Delta phenomenon» (The Delta phenomenon, 1991)).
In the early 80-ies.Wells founded the "International Society for Delta» (Delta Society International).The aim of the society was to study the financial markets.Inbound in this society of his own company Trend Research Ltd develops trading software.
Wilder, author of such well-known indicators, such as Average True Range ( Average True Range ), Relative Strength Index ( Relative Strength Index ), LED directional movement ( Directional Movement Indicator ) and parabolic system ( Parabolic Stop and Reverse).
Now George. Welles Wilder Jr., perhaps the most famous living market guru.Trader retired living on the beautiful South Island of New Zealand.The experience of past years has reflected in his latest book "The Wisdom of the ages in the acquisition of wealth."
He says that if he had known in his youth that is written in this book, it would have been much richer than it is now.Its indicators are considered basic to many of the technical analysis software, and includes virtually all modern trading terminals.
J. Welles Wilder, Jr. is an active trader and consultant on technical trading systems and methods, the author of many articles appears on radio and television.
And finally, a couple of interesting quotes this remarkable Trader:
"If you can not cope with the emotions - get out of trading."
"Some traders are born undisciplined.Life teaches.It will hurt. "
General description indicator
RSI indicator is an oscillator, so it varies in a certain area bounded by the maximum and minimum value.Relative Strength Index is plotted on a scale from 0 to 100. It works best, reaching areas extremes.The criterion of evaluation are two lines drawn at 30 and 70. It is believed that above 70 is perekuplennosti zone, and below 30 - pereprodannosti.Therefore, when the value of the RSI reaches and climbs above 70, there is a threat to price decline;Movement below 30 is seen as a close-rise warning.Some analysts are advised to take as the boundaries of the levels 30 and 70 only when the sideways, and 20 and 80 - with a strong bull and bear.
course, excess levels of 30 and 70 still does not mean that you need to immediately begin transactions.After all, the market may be in a state of overbought or oversold for a long time, and the oscillator, warning of a trend change in advance, does not explain exactly when this might happen.
introducing RSI, W. Wilder recommended using a 14-day option.Later widely as 9 and 25 day RSI.Often taken as a period of 5, 7, 9, 14, 21 or 25. Most programs offer one of these numbers as the default values.
Day RSI is based on the price data, covering the last 9 or 14 days.The weekly schedule will include the last 9 or 14 weeks.Minute, of course, 9 and 14 minutes.
number of time periods in the calculation of RSI can be varied, so I recommend to experiment with them to choose the most suitable option.The shorter the period RSI calculation, the more sensitive indicator to current price changes.
How to choose the best time?The fact that different timeframes of the same currency pair, he will be different, so do not get to use one well-chosen period indicator on all time scales of interested couples.Generally, the smaller the time frame, the longer must be the period and vice versa.Choose the best period of the RSI indicator is not difficult - it is necessary to sort out periods of consistently and looking at overbought and oversold zones.Once the basic pronounced (reversal, key) highs and lows on the chart will be reflected in the indicator of overbought and oversold areas, while the rest will be at the same time (at least most of them) outside these areas, consider that the best period found.
As usual, the smaller the period, we will use the more sensitive to the curve and the more signals we get.The shorter the period chosen, the closer to the extreme values of the scale are indicators RSI index corresponding to the "overbought" or "oversold" market conditions.The greater number of days in the period of the index calculation, the smoother will be its performance.
More information about the oscillator settings can be nuances here.
Since the computer does all the calculations for you, no need to remember the formula.Nevertheless, her knowledge will help you to better understand the operation of the indicator, and it is - the key to its proper use and interpretation of the signals fed to them.
Wilder asserts that there are two main problems of building prices (based on the price difference), the rate of movement of the curve.The first is due to the randomness of the tempo curve movements due to the frequent sharp differences between the values of prices in the period under review.A sharp increase or decrease in prices that took place ten days ago (in the case of a ten-tempo display), today can cause a sharp turn of the curve - even if current prices remain relatively calm.Therefore, in order to minimize such distortions, it is necessary to smooth the pace of the curve.The second problem relates to the need for permanent borders band oscillator for comparative analysis purposes.RSI index formula solves both of these problems: it does not only smoothes the curve, but also provides a constant vertical scale from 0 to 100.
should be noted that the term "relative strength" is used in the Wilder somewhat mistaken and often misleads thosewho are familiar with this concept for stock market analysis."Relative Strength" is traditionally understood as the curve of the ratio of two different objects.As for Wilder's Relative Strength Index, it does not measure the "relative strength" of various objects, and because the meaning that the author gives the term is not entirely accurate.However, the RSI index solves the problem of chaotic motion of the oscillator curve and allows you to set the permanent borders of the upper and lower vibrations.
positive (U) and negative (D) price changes are used for the RSI calculation.The day is called "upward" if the closing price is higher today than it was yesterday.
Day called "top-down", if the closing price is lower today than it was yesterday.
If the closing price of yesterday and today are equal, then U and D values are 0. When U and D are smoothed exponential moving average c N period is calculated first, "the relative strength of» (Relative Strength, RS):
RS based on the calculated himself RSI:
easy to see that:
many sources indicate no exponential moving average (EMA), and simple (SMA).
When RS calculation must take into account the situation where the denominator is zero.This is possible using a simple moving average (SMA), when the entire averaging period, the price was only up and, consequently, all the values of D = 0.In this case, you need to take RSI = 100.
Of course, the price for calculation of the indicator can take any.For terminal MT4 is the closing price, open, high or lows, average, typical and weighted price.It is also possible to build on the RSI indicator other data.
overbought and oversold levels
RSI index values applied within the vertical coordinates from 0 to 100. When the index is above 70 or below 30, the index captures the state of overbought or oversold, respectively.The chart of the oscillator delayed two horizontal lines corresponding to the values of 70 and 30. These lines are often used to obtain signals to buy and sell.As already mentioned, the oscillator is below 30 indicates an oversold market.
Suppose a trader believes that the price drop is about to reach the limit, and awaits the opportunity to go long.He sees that the curve of the oscillator falls below 30, they find themselves in the oversold zone, and hopes that in the oscillator dynamics in this area there is some discrepancy or forms a double bottom.When the curve crosses the border again - this time rising -Many traders regard this as confirmation that the oscillator trend has turned up.Conversely, re-crossing the line 70 when falling from the overbought area of the curve is often regarded as a signal to go short.Of course, excess levels of 30 and 70 still does not mean that you need to immediately begin transactions.After all, the market may be in a state of overbought or oversold for a long time, and the oscillator, warning of a trend change in advance, does not explain exactly when this might happen.You should always observe closely the intersection of line 70 and 30. While the strong upward trend is not unusual that
oscillator RSI rises above 70 and stays there for a long time.This usually is a sign of a strong upward trend.In such cases, probably best to ignore the oscillator for a while, until it stays above 70. The intersection of less than 70, especially if it occurs after a long time, often gives a good signal trend change.
Many traders believe the intersection below the line 70 as a sell signal and the intersection of the above line 30 a buy signal.
not necessary to use it as a level 70 and 30. Experiment with layers.For the bull market will approach 40 and 80, and a bearish 20 and 60. In order to reduce the total number of signals and increase their quality can be used at 20 and 80. I recommend using a 5 percent rule: draw a line so that the RSI stayed her 5 percentall the time in the last three months, for example, if you are trading on the daily charts.Adjust the reference line as needed.
On a very quiet market with low volatility, you may notice that the RSI line fluctuations are between 70 and 30. You may want to try to increase the amplitude of the RSI risk by shortening the time period.Try to choose a lower period, such as 7 or 5. Reverse the case involves a situation where the RSI line is too volatile.Frequent transitions above 70 and below 30 are less significant, it is difficult to decide between the real market signals and noise.In this case it is necessary to reduce the amplitude of the line by increasing the RSI period, for example up to 21. This will eliminate many small movement and help identify those who have value.
signal to buy - at the exit of the RSI oversold area, for sale - at the exit from the overbought RSI.Such signals are taken only in the direction of the main trend.Signals ignored against the trend!It is best to combine these signals with signals from other indicators or technical analysis.The signal at the output of the position - when you reach overbought or oversold zones.For example, when the RSI overbought zone close position to buy or tightens the foot closer.
Most often, the RSI indicator is used in his work scalpers during periods when the market is a narrow flat.Note the drawing with examples of entry points on the RSI indicator: the euro / dollar exchange rate has entered the overbought zone - 70, crossed it from top to bottom and we go on sale, and once the price has entered into oversold territory - 30, we come to buy.This tactic is very effective in flat, when the position traders await clarity on the Forex market, scalpers by using the RSI indicator just cram your pockets with money that's as accurate short transactions.
levels 40/80 and 20/60
As I mentioned above, in an uptrend is advisable to use the levels of 40 and 80. At the same time we make purchases only when the indicator level is lowered to the level of 40.
in a downtrend, it is advisable to use the levels 20 and 60. in this case, we consider only the transaction to sell when the indicator level rises to the level of 60.
Defining trend reversal on the levels 20/60 and 40/80
in the application level20/60 and 40/80 all goes fairly smoothly, but how do you know when to use what levels?It's pretty easy.So when niskhodyashem trend, the RSI indicator is lowered to the level of 20, and never reach the level of 80. When the upward hangs out near the 80 and did not want to go to 20. Therefore, when there is a situation, as in the picture above, we can talk about the change from the downward trendthe rising in our case.on a downward trend indicator several times fell to a level of 20, while never reaching for level 80. But one day RSI is still broke the level of 80 - from this moment you have to be careful, it is expected a change in trend.The next recession indicator, which is not held up to level 20 confirms the change in trend.
While the RSI oscillator attention is focused on the lines of oversold and overbought, the line 50 is also important.You may notice that a strong trend the price often finds resistance at this level.
If you are looking for up-trend confirmation, make sure that the RSI is above 50. If you think that the market is down-trend, then make sure the RSI is below 50. Let's say you've found an upward trend, but doubt itforce.To avoid false alarms, wait for the moment when the RSI crosses above the 50 level, thus confirming the hypothesis.Now we can say quite confidently that the trend has formed, the RSI crossing above 50 level - a good confirmation.You may notice, for example, that during the correction at the upper trend line RSI will often find support at line 50, before returning again.During the lower trend line RSI bounces will often stop near the line 50.
Use the signal line 50 to confirm the trend.If the RSI is above the 50 line, the uptrend and it is recommended to enter only in the purchase, if it is below - consider only sales.
When the index indicators are in oversold or overbought zone on the oscillator chart can form a special model that Wilder calls the "failure swing» (failure swing)."Failure swing" in the position of the vertex is that the upward trend next peak indicator curve and does not reach the level of the previous peak, after which there is a falling curve below the level of the previous recession."Failure swing" base at position occurs when the incident light (below 30) still does not fall below the level of the previous decline, and then rising, surpasses the previous peak.