WHAT IS THE RSI INDICATOR?

What is the rsi indicator? If you still don’t know by now, you should consider reading this article to better understand the mechanism and how to apply it in trading to achieve greater efficiency.

WHAT IS THE RSI INDICATOR?

RSI (Relative Strength Index) in Vietnamese is a relative strength index. The indicator was developed by a mechanical engineer J. Welles Wilder in 1978. It is an indicator used in technical analysis.

This is a useful tool in and applied in trading: stocks, forex or even cryptocurrencies. With this indicator you will know the bullish or bearish signal.

WHAT DOES THE RSI INDICATOR TELL US?

First, let’s take a look at the formula of the RSI:

RSI = 100 – [100 / ( 1 + (Average Price Change / Average Price Down Change ]

From this formula, we can see that the indicator shows the correlation between the buyer and the seller. The RSI indicator is represented from 0-100 and the equilibrium level will be 50.In addition, you can also know the overbought zone if the index exceeds 70 (buyers dominate) and oversold if the index is below 30 (sellers dominate).

This means that when the RSI exceeds 70, the price may turn around and fall. When the RSI is below 30, it indicates that the selling force has declined and there is a possibility that the price will rise again.

HOW TO USE THE RSI INDICATOR

The most traditional and basic way to use the RSI is to consider selling when the index crosses 70 and buying when the index is below 30. But this method is usually not very effective. Because if it’s that easy, there will be no one to swing the peak, right?

Another simple way is to use level 50. In an uptrend market, the RSI will fluctuate from 40-90 with the 40-50 zone as support. In a bearish market, the RSI will fluctuate from 10-60 with the 50-60 zone as resistance. There are also many ways to use this indicator in addition to the ones I mentioned above.

REGULAR DIVERGENCE

RSI As for divergences, there are also 2 divided into 2 types: positive divergences and negative divergences. 

BULLISH DIVERGENCES

Bullish divergences are created when the RSI bottom creates a higher low and the price produces a lower lower low.

It indicates bullish momentum and is a sign that you can buy or open a long position.

BEARISH DIVERGENCES

Bullish divergence occurs when the RSI bottom creates a higher low, while the price creates a lower low.

It shows bullish momentum, a sign to buy or open a long position.

RSI CLOSED DIVERGENCE

At this point, I have talked about the usual divergence as you have seen, the result is usually a reversal from a decrease to an increase or from an increase to a decrease.

But here I will tell you about the hidden divergence. The price will continue the uptrend or the downtrend. To identify this type, it will also have 2 types of bullish hidden divergences and bearish hidden divergences.

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CLOSED DIVERGENCE INCREASES

Bullish closed divergence occurs when RSI creates a lower low, and price creates a higher low.

When you notice this, you will know that the price can continue to go up.

CLOSED DIVERGENCE DECREASES

Bearish closed divergence is formed when the RSI produces a higher high and the price produces a lower high.

This is the signal that the indicator gives that the price will continue the downtrend.

DRAW TREND LINE FOR THE RSI

We usually draw a trendline for the price, right? But now that we know about the Relative Strength Index, we can also draw a trendline.

PUT PATTERNS IN THE RSI

Models that are commonly applied to racks such as: 2 peaks (bottoms), wedges, cups and handles,… You can also apply to the RSI indicator.

HOW TO SET UP THE RSI ON TRADINGVIEW

Tradingview is a useful tool that helps you do technical analysis with ease. These drawings are now on Tradingview.

Step 1: Create a Tradingview account and choose a trading pair If you don’t know how to create one, you can refer to this article about Tradingview.

Step 2: Select the asset class you want to trade.

Step 3: You select Indicators or click the “/” button. Next, you search for the RSI and then look for the Relative Strength Index. You just need to click on it and you’re done

You select the type of asset you want to buy the trade by entering its name or code in the Search Ticker box at the top. After you have selected, you can click the Full featured chart button to be able to use its functions.

To draw like the figures I presented above, you can use the toolbar on the left to draw.

CONCLUDE

What is the rsi indicator? Hope this article has helped you better understand the RSI index and how to use it! If you have any questions, please comment below.