RSI (Relative Strength Index)

The RSI indicator, short for Relative Strength Index, is yet another technical indicator that tries to identify a currency pair’s overbought and oversold conditions by constantly comparing the amount of periods that closed up versus the amount of periods that closed down in a given time interval (usually 14 periods, the RSI indicator’s default setting). I say “tries”, because in Forex nothing is certain.

As you can see in the picture below, the RSI is displayed below your main data window and its values range from 0 to 100. The two most important levels of the RSI indicator are 70 and 30. When a market comes near or crosses 70, it is becoming overvalued and is entering overbought territory. This could be a sign that this market could be reversing direction soon, or that it at least has the potential for a pullback. On the other hand, a slide near or under the 30 level may indicate that the market is becoming oversold, making it a likely candidate for a change in direction.

The example below shows two such overbought/oversold scenarios. Scenario 1 shows how the market surpasses the 70 level and changes course, while scenario 2 shows a clear reversal preceded by the market falling under the 30 level.

rsi

 

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