Tags: DivegrenceIndicatorsRSISettings 8 min read The relative strength index or the RSI is a momentum oscillator used to measure the velocity and magnitude of directional price movements. The indicator provides the investors with sell or buy signals when the asset is overbought or oversold respectively.
The closer this line gets to the zero mark the higher are the chances that the asset is oversold. The price, in this case, can be expected to go up.
According to the indicator, the asset price will, therefore, fall soon. It has become one of the most popular oscillator indices and is now considered to be a core indicator in the technical analysis software.
How to use RSI indicator in trading? If the indicator provides a lot of false alarms it is possible to increase the overbought threshold to 80 and decrease the oversold threshold to Welles Wilder recommended a smoothing period of 14, which of course can be changed for the purposes of short- and long-term strategy adaptability.
Shorter or longer periods are used for alternately shorter or longer outlooks.
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The RSI is a universal indicator and can be used for the purpose of trading any assets from indexes to currency pairs and derivatives. The RSI graph will appear in the bottom part of your screen.
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Remember that the wider the corridor the fewer signals you get, but at the same time they will be more accurate. The opposite is the case if the threshold levels are closer to each other: the crossover signals will appear more often, but the number of false alarms will also increase. This is the most frequently used preset for this indicator.
Traders expect the RSI to bounce from 30 and 70 threshold lines. Risk-averse investors set up the indicator in a way that will make the RSI less sensitive and therefore minimise the number of incorrect signals.
More extreme high and low levels — 90 and 10 — occur less frequently but indicate stronger momentum.
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Divergence Divergence is another way to use the above-mentioned indicator. If the movement of the underlying prices is not confirmed by the RSI it can signal a trend shift.
Divergence as an indicator of the price reversal Divergence can be a good indicator of a coming price reversal. In the example above the price of the asset goes down, while the RSI demonstrates the opposite movement. This situation is followed by the trend shift.
Conclusion The RSI is a powerful tool that can tell traders when to buy and when to sell. Sometimes it can also predict the trend other indicators are too slow to acknowledge.
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However, it is rarely used on its own and is recommended to be combined with other indicators. The RSI can be combined how to set up rsi indicator for binary options other indicators for increased accuracy and efficiency.
How to use it in trading?
Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.