How to use the RSI to trade?

To make the best forecasts when trading, it is essential to carry out various analyses. Several tools can be used in this context. The RSI or Relative Strength Index is particularly interesting. How can this technical indicator be used for successful trading?

RSI or Relative Strength Index: presentation

This technical indicator was created by J. Welles Wilder. It is based on two points. On the one hand, it indicates the strength of a trend (will it persist or crumble?). On the other hand, it allows to know if the market is in a situation of over-selling or over-purchasing. To know the RSI, it is enough to carry out a simple calculation: RSI = 100 – {100 / (1 H/B)}. Here, H is the average of the increases over X time units (minutes, days…) while B is the average of the decreases over X time units. It should be noted that the calculation of the RSI is now done automatically thanks to ever more efficient software. Be careful, the value of the RSI can vary according to the average used (arithmetic, exponential or other average…).


How to use the RSI?

After calculating the RSI, the figure is between 0 and 100, and its value is closer to more than 100 when the market is rising (slightly or strongly). It is said to be “over-purchased”. As the RSI approaches zero, the trend is downward (slightly or strongly). The market here is “over-sold”. If its value is 50, it means that the market reaches an equilibrium point, at least in relation to the unit of time that has been chosen for the calculation of the RSI. The important point to remember is that the result of the RSI differs depending on the time unit chosen and the delay (i.e. the value of X in the formula).
To use the RSI properly, you need to define the right setting knowing that each asset has its own volatility. In addition, there are several trader profiles. Some trade in the short term or very short term, others trade for a day or more… All this must be taken into account for proper use of the RSI.

In summary, what you need to remember

Ultimately, the RSI gives indications of the direction that the prices will take as well as the strength of a trend. When its value is really very high, it implies that the rise will soon slow down and chances are the trend will soon be reversed. It’s like climbing a mountain. When you reach the top, you always end up going down. And the opposite is also true. In the event of a low value, an increase is to be expected. Finally, no indicators should be used alone. Several tools must be combined to ensure that the best decision is made. You can use the RSI in Forex or as a binary option via the trading platforms offered by brokers.