📈 RSI Indicator: Use It As Smarty Money Does

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RSI shows overbought & oversold levels
RSI Indicator

Who Developed The RSI (Relative Strength Indicator)?

Welles Wilder came up with the “RSI Indicator” back in 1978, and the capital letters stand for “Relative Strength Index“. Basically it is a very effective momentum oscillator that will empower the trader to measure the speed of price movements and to predict the way a trend is going to evolve.

Since its creation more than three decades ago, this best forex indicator has been altered and improved to meet the needs of those trading Forex. RSI indicator nowadays is probably one of the most popular indicators used in different markets.

Essentially, the same mechanism that proved its worth in the stock market is being used and people are using it in conjunction with other similar indicators forex.

The benefits are self-evident and it doesn’t take an expert to interpret the RSI charts, although it is a bit risky to base your decision solely on these readings, if you are not an experienced trader. Forex signals are going to simplify the task of those who are reluctant to place their money on an order that they don’t really comprehend.

What these signals do is to interpret the charts and integrate the RSI Indicator with other forex indicators such as ADX, CCI, or TRIX and supply the client with easy to understand integration.

This doesn’t mean that only a part of the reading is being used, but the live feeds will simply take a more manageable form so that the customer will not have any second thoughts.

FX Delta helps you consistently ride the trend. Using FX Delta you can get the ultimate 1-click trade signals based on riding market trends, accompanied by the best risk-reward strategy and accurate timing entry.

It is the speed that matters just as much as the quality of the signal and if you spend too much time trying to make something of the RSI Indicator charts, you might miss out on an opportunity.

Predicting a trend is a tough thing to do for inexperienced traders and even experts are finding it hard to single out a trend, out of all the noise Forex creates. It is not unheard of for traders to misread a trend and place a buy or sell order on something that is nothing more than the market ranging a little.

The longer the option remains active, the more vulnerable the player will be, and the higher the losses will be when things turn sour.

The RSI Indicator and its counterparts are simply determining the strength of an existing trend and will keep you on guard about the possible oscillations. If you know how to read the RSI indicator, you will be informed in advance to close your positions and open new ones.

How Does RSI Indicator Work?

RSI Indicator is a bounded indicator. The readings of RSI can only be a number between 0 and 100. The indicator is set by default as 14 periods. If you are using daily charts, it means your overbought & oversold readings are only valid in regards to the last 14 days’ values.

How The RSI Indicator Is Calculated?

The formula of RSI Indicator is calculated as below:

RSI = [100 – {100 / (1 + RS)}]

RS means “Relative Strength” in the formula.

What Are The RSI Overbought & Oversold Levels?

The most common “RSI overbought level” is 70, and the “RSI oversold level” is 30. Some people like to use 80and 20 values as overbought & oversold values. Although this is going to give fewer signals to trade, it will keep you out from many bad trades.

Moreover, short-term trading setups may adjust the RSI indicator to consider 20 and 80 as oversold and overbought levels (instead of 30 and 70), so it is less likely to provide false signals.

Should I Use The Default 14 Period Of RSI Indicator in my Trading?

Many traders like changing the RSI default period to better implement RSI readings into their trading strategy. If we drop the RSI default value from 14 to 10, it is going to be much more sensitive. Similarly, raising the RSI default period to 20 is just going to give a slower changing market momentum reading.

Momentum indicators measure acceleration (a) as in classical physics. It tells us how fast the market moving before the movement even starts. Similarly, a stagnation in RSI means a possible slow down in market momentum. Overbought/oversold levels are today commonly used by many manual and algorithmic trading strategies. RSI can effectively point out how selling or buying pressure changes over time.

How Does RSI Show Where The “Smart Money” Is?

With the term “Smart money” is usually meant large investors positions themselves on the right side of the market. The knowledge of how the smart money moves can give you a significant edge in your trading.

Smart money knows how to time the market. Without any doubt, timing is one of the toughest challenges for the traders.

Having the capability to spot turning points in the market before it happens will present higher reward opportunities. Having the actual skillset of taking a trade at or near its turning point you have the following benefits.

  • You can use a very tight stop loss which may let you use a bigger position sizing.
  • You can catch the most lucrative part of the market move.
  • Timing the market right will give you the possibility to know quite fast if your initial trading plan is good.

But how does RSI can help us to see where the Smart money is? The answer to this question is divergences in between the price reading and RSI values.

RSI Divergence spot move of smart money
Divergence occurs when the indicator and price moves in different directions

Accurately identifying if the smart money is doing accumulation or preparing for the start of a new trend.