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Relative Strength Index – RSI: The Turnaround Kid

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Relative Strength Index – RSI: The Turnaround Kid

The Relative Strength Index (RSI) oscillator by J. Welles Wilder Jr. uses only the closing price. The standard default setting of 14.0 at your charting service of choice should be all you need to identify turnaround situations. It most definitely can be used to complement your currency trading strategies (a.k.a. forex trading strategies).

RSI is a measure of investor sentiment, and as such is used to forecast shifts in trend. It is prescient in forecasting turns in the market.

For some futures contracts, financials and currencies, it has the uncanny ability to turn, just as the markets seek out a level of support or resistance, only to then take off to another price level.

Where price trends, RSI goes up the limits of its excursion, and bounces around there for an extended period of time, until the trend eventually reverses.

Indicators like RSI usually bounce around (or oscillate) between fixed extreme values based on price movement, position of close in range, or change in price over time. With RSI, the values can range from zero to 100, but typically they fall between 20 and 80.

A level of 70 suggests the market may have peaked (i.e., buying is dissipating), and a level under 30 implies selling may be losing momentum (i.e., the market may have bottomed out).

Wilder delineated the strengths of RSI, including two that could just qualify it as one of the best overall indicators around:

1. Excursions beyond 70 and 30 are setups for tops and bottoms.
2. Divergence between RSI and price is a clear signal of impending reversal.

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