Lesson 16: The Relative Strenght Index (RSI)

Developed by J. Welles Wilder and introduced in his book "New Concept in Technical Trading Systems" in 1978, the RSI is now one of the most widely used indicators on the financial markets in general and forex in particular.

This indicator measures market dynamics by comparing gains and losses over a defined period of time. The RSI is an indicator of the oscillator family, with an overbought zone and an oversold zone.

J. Welles Wilder recommends the use of the RSI with a period of 14 however the period 21 respects much more the areas of overbought and oversold. Periods 9 and 5 are also relevant in the short term.

The RSI terminals

Over-purchase: 70 
Overseas: 30 
Neutral zone: 50

Methodology for positioning with the RSI

1 / Define the trend on the timeframe 
2 / Interpret the RSI according to the trend observed on the same timeframe

Since we will rely on the trend to interpret the IHR, there will then be 3 main uses of the IHR, as there are 3 types of trends.

Using the upward trend RSI

In a healthy uptrend according to dow's theory, we are interested either in the exit of the RSI from its oversold zone, or in a rebound on the entrance to its oversold zone or in crossing or rebounding its zone of neutrality.

Purchase signals in the case of an uptrend
* Exit of overbought zone
* Rebound on entry in
overbought zone * Crossing of its neutral zone
* Bull rebound on its zone of neutrality

Using the bearish trend

In a healthy downtrend according to dow's theory, we are interested either in the exit of the RSI from its over-purchase zone, or in a rebound on the entry of its over-purchase zone or in the break or Rebound on its zone of neutrality.

Selling signals as part of a downtrend
* Exit of oversold zone
* Rebound on entry in oversold zone
* Breakdown of its neutral zone
* Bearish rebound on its neutral zone

Use of the RSI in a neutral trend

In a "neutral" trend configuration, we can concentrate on all the indications, the idea is to find buyers' arguments on the RSI when the course is on a support or sellers arguments on the RSI when the course is on a resistance .

Signals to buy and / or sell in case of neutral trend
* All previous arguments correlated to a support or resistance

We will see later that the divergences will complement and correlate these uses to give us more information.