RELATIVE STRENGTH INDICATOR (RSI)

The relative strength indicator (RSI) provides clues to whether the currency pair is overbought
or oversold. It compares averages of period closes that are up against period
closes that are down. It is an oscillator that has a range of 0 to 100. Traders using RSI
should note that when RSI reaches below 20 or above 80, it is considered to be peaking in
its strength. But these levels do not mean they are automatic buy or sell signals. Applying trend lines to the RSI indicator is a more precise approach to when and where one can
put on a buy or sell trade. In Figure 12.9, the trend-line break in the RSI coincided with
the failure of the price to retrace above the Fib line. This provides added confirmation of
a weakening condition, and it is appropriate to apply trend lines on indicators that are
oscillators, such as RSI. We see a similar RSI trend break failure in Figure 12.10.
RSI has default settings at 14 periods, but traders can reduce this period to 9 to eliminate
some of the lag and make the indicator a bit more sensitive to the recent actions.
Traders should also note that there are variations in the RSI index formula producing different
RSIs. But they all are relatively close, and personal preference will decide which
one you choose.




By ABE COFNAS