Relative Strength Index (RSI) – Momentum Indicator

The relative strength index, or RSI,  is yet another momentum indicator, or oscillator, that measures the relative internal strength of the currency pair against itself. Again, your trading platform will do all the calculations for you. Although it can be helpful to know the math behind the indicators, for now only knowing the interpretation is sufficient.

How Relative Strength Index RSI Works

When you click on the relative strength index, or RSI button, an oscillator will appear underneath your forex dance floor, scaled from 0 to 100.

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For a standard 14-day period, a reading over 70 indicates that the currency pair is overbought, while a reading below 30 indicates that it is oversold. Therefore, when the RSI enters the overbought zone, it could be signaling that it is a good time to sell the currency pair. Conversely, when the RSI enters the oversold zone, it could be indicating a buy signal.

Relative Strength Index (RSI) Buy and Sell Signals

Longer time spans in the Relative Strength Index calculation result in shallower swings. On the other hand, shorter time spans result in deeper swings. Therefore, the 70-30 combination is inappropriate with a time span other than 14 days.

For example, for a 9-day RSI, an 80-20 combination gives a much better feel for the overbought and oversold extremes than the 70-30 combination.

So be sure that your RSI is set to a 14-day period!