What is the RSI Indicator?
It is a Forex Meta 4 add-on program that is programmed with the RSI indicator mainly to analyze price change rates. With the signals it receives, it will be effective in making the right decision by directing you to invest. The values of the RSI oscillator, typically measured over a 14-day period, fluctuate between zero and 100. The Relative Strength Index shows oversold market conditions below 30 and overbought market conditions above 70.
Below we can see the simple RSI indicator.
How is the RSI Indicator Calculated?
RSI calculations are started as a period. The period used by Welles Wilder and considered general use is 14 days. It is also possible to use it by narrowing or expanding the period. As a general rule, when the periods of the indicators are reduced, the indicators become more sensitive to price movements. This means that they produce more signals.
The RS value is calculated. The RS value is the ratio of the arithmetic mean (P) of the sum of the positive closing differences in the last 14 days and the arithmetic mean (N) of the negative closing differences of the last 14 days.
THE FORMULA IS AS FOLLOWS:
RS = P / N
RSI = 100 – (100 / (1 + RS))
This formula is to compare ascending days and decreasing days as a percentage. For example, on the days when the index takes the value of 50%, it should be understood that the increase and decrease are balanced in the relevant period.
In the graph shown below, we see the above formula plotting the value of 50%. We see the price of the RSI indicator, which shows the bottom level of the market that is going on a downtrend. The RSI indicator touched the 70 levels 2 times before rebounding to the decline. Here we can see that the RSI indicator is working correctly.
How to Use the RSI Indicator?
Two limits are set on the RSI indicator, 30 and 70.The zone of 30 and below is indicated as an oversold zone, and the zone above 70 and above is indicated as an overbought zone. If the indicator is in these regions, the current movement is expected to change direction. In particular, turns from extremes are determined as stronger signals.
At levels where the trend is strong, the RSI can stay in extreme zones for a long time and give false signals. It works better in a horizontal market than in a trending market. The RSI indicator is commonly used by placing it below price charts.