3 Best ways for trading with indicators effectively

Relative Strength Index (RSI) What it is, how it works and how to profit from it Learn how to measure the magnitude of price changes in 5 minutes

What Is the Relative Strength Index (RSI) Indicator

The Relative Strength Index (RSI) is a momentum indicator used in technical analysis. The RSI measures the speed and magnitude of recent changes. 

  

The RSI indicator is displayed as an oscillator (line graph) on a scale from zero to 100. The indicator was developed by J. Welles Wilder Jr. It was presented in his 1978 book 'New Concepts in Technical Trading Systems'. 

  

The RSI can do more than indicate overbought and oversold. It can also indicate which securities may be ripe for a trend reversal or corrective pullback in price. It can indicate when to buy and sell. 

  

Traditionally, an RSI reading of 70 or higher indicates an overbought condition. A reading of 30 or less indicates

an oversold condition , It is considered the most useful indicator in tradingview. 

How the Relative Strength Index (RSI) indicator Works

As a momentum indicator, the RSI compares a security's strength on days when prices are rising to its strength on days when prices are falling. Relating the result of this comparison to the price action can give traders an idea of how the price action will perform. The RSI, used in combination with other technical indicators, can help traders make good trading decisions.

How is RSI calculated? 

the most useful indicator in tradingview RSI uses a two part calculation that starts with the following formula

The average profit and loss used in this calculation is the average percentage profit or loss over the review period. The formula uses a positive average loss value. Periods with price losses are counted as zero in the average profit calculations. High-priced periods are counted as zero in average loss calculations

The standard number of periods used to calculate the initial value of the RSI is 14. For example, imagine the market closed higher seven out of the last 14 days with an average profit of 1%. The remaining 7 days closed lower with an average loss of −0.8%

The first RSI calculation will look like the following extended calculation

Once you have 14 periods of data available, the second calculation can be done and its purpose is to smooth the results so that the RSI gets close to 100 or only zero in a market with a strong trend either up or down

Overbought or Oversold 

When the RSI crosses 30, it is a bullish signal and when it crosses 70, it is a bearish signal. In other words, one can interpret that RSI values of 70 or higher indicate that the price has become overbought. It may be poised for a trend reversal or a corrective price pullback. An RSI reading of 30 or below indicates an oversold condition. 

 

Overbought indicates that the price has reached an overpriced level. This means that its price is higher than it should be, according to practitioners of technical or fundamental analysis. Traders who see signs of overbought may expect a price correction or trend reversal. Therefore, they can sell. 

Why is RSI important 

• Traders can use the RSI to predict price behavior. 
• It can help traders confirm the validity of trends and trend reversals. 
• It can indicate overbought and oversold. 
• It can provide short-term traders with buy and sell signals to confirm your analysis. 
• It is a technical indicator that can be used in combination with others to support trading strategies to increase the winning rate with the most useful indicator in tradingview.