Reprinted from: http://www.alpari.co.uk/en/market-analysis-guide/technical-analysis/rsi.html

Oscillators: Relative Strength Index (RSI)

Relative Strength Index (RSI) was developed by J. Welles Wilder in 1978. Nowadays, it is considered to be the most popular oscillator.

Relative Strength Index (RSI) formula:

RSI = 100 - (100 / (1 + U / D))

Where:

• U - average value of the positive price changes over a period;
• D - average value of the negative price changes over a period.
  

The most frequently used time periods are 8 and 14.

RSI indicator is considered overbought if it is above the 70 level, and oversold if it is below the 30 level.

Relative Strength Index (RSI) signals:

• If the indicator is below the 50 line, then the market is considered to be bearish;
• If above the 50 level - bullish;
• If the indicator is around the 50 line it signals that the market is flat;
• Bullish divergence / bearish convergence � the main signal of the trend weakness;
• Under flat conditions exit from the overbought (oversold) territory is a signal to sell (buy);
• Different types of the trend analysis can be used to analyze Relative Strength Index (RSI): trend lines, support / resistance levels, chart reversal and continuation patterns.

The figure below, for example, shows that the trend line on RSI being broken several bars before the analogical line on the price chart:

In order to add the Relative Strength Index (RSI) indicator in Metatrader 4, use the "Insert -> Indicators -> Oscillators -> Relative Strength Index" menu sequence.

Relative Strength Index

Relative Strength Index

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Relative Strength Index, or RSI, is similar to stochastics in that it identifies overbought and oversold conditions in the market. It is also scaled from 0 to 100. Typically, readings below 20 indicate oversold, while readings over 80 indicate overbought.

Using RSI

RSI can be used just like stochastics. From the chart above you can see that when RSI dropped below 20, it correctly identified an oversold market. After the drop, the price quickly shot back up.

RSI is a very popular tool because it can also be used to confirm trend formations. If you think a trend is forming, take a quick look at the RSI and look at whether it is above or below 50. If you are looking at a possible uptrend, then make sure the RSI is above 50. If you are looking at a possible downtrend, then make sure the RSI is below 50.

In the beginning of the chart above, we can see that a possible uptrend was forming. To avoid fakeouts, we can wait for RSI to cross above 50 to confirm our trend. Sure enough, as RSI passes above 50, it is a good confirmation that an uptrend has actually formed. Okey dokey, we've covered a smorgasbord of indicators, let's see how we can put all of what you just learned together...