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.
In order to add the Relative Strength Index (RSI) indicator in Metatrader 4, use the “Insert -> Indicators -> Oscillators -> Relative Strength Index menu sequence.
The figure below, for example, shows that the trend line on RSI being broken several bars before the analogical line on the price chart:
