What is the RSI line and why is it considered an important tool? RSI provides information about the strength of price trends. At the same time it can be combined with other indicators. Examples are MA, Bollinger Bands, and MACD. The purpose is to increase the accuracy of trading decisions. So, let Forex Trading introduce you to Divergence RSI and its uses.
What is the RSI line?
The RSI (Relative Strength Index) belongs to the group of momentum indicators in technical analysis. It is used to measure the relative strength of the market. Divergence RSI works by assessing the level of overbought or oversold. RSI is often represented as an oscillator graph, with values from 0 to 100.
RSI is an initiative of J. Welles Wilder. It was introduced in the book “New Concepts in Technical Trading Systems” in 1978.
Formula to calculate RSI
The formula to calculate RSI is as follows:
RSI = 100 – 100/(RS+1)
In there:
RS = Σ(price increase)/Σ(price decrease) – Average price increase/Average price decrease
What is the meaning of the RSI line?
As already mentioned, Divergence RSI is a momentum indicator. It is an instrument that measures the speed of price movements.
- An increase in momentum indicates that there is strong buying in the market.
- A drop in momentum is a sign of waning interest in products that are slowing down.
- Oversold and overbought can occur in the market
The structure of Divergence RSI includes two main components:
- The Divergence RSI line moves between two values from 0 to 100.
- The upper border usually defaulted to 30.
- The lower border usually defaulted to 70.
- When RSI is below 30. This shows that the market is in an oversold state. (Probably at the bottom point and likely to increase in price again).
- When the RSI exceeds 70, an overbought phenomenon appears (It may be near the peak and there is a possibility of a price decrease).
Initially, Divergence RSI is usually calculated over a period of 14 periods. Depending on the level of sensitivity needed, you can adjust this number of cycles. The aim is to make Divergence RSI more sensitive (by reducing the number of periods) or less sensitive (by increasing the number of periods).
For example, a 7-day Divergence RSI will be more sensitive than a 21-day Divergence RSI. At the same time, in short-term trading settings, it is possible to adjust the limits of the overbought zone to 20 and the oversold zone to 80 (instead of 30 and 70). The purpose is to minimize signal noise and increase accuracy.
See more: Be more successful through this technical analysis
How to install Divergence RSI on the chart
Step 1: Visit the chart of any cryptocurrency and click on the “fx” icon.
Step 2: Search for the keyword RSI, then select “Relative Strength Index”.
Step 3: Once the RSI indicator is placed on the chart, the system automatically sets the period to 14..
When you want to use Divergence RSI with a different number of days, you can hover and select the settings option.
Step 4: To choose the desired length, simply enter the number in the corresponding box. Then click “OK” to complete. If you want to track RSI for 7 periods, enter the number 7 in that box and press “OK”.
Signals of the RSI index
From here on, both RSI can apply the concepts below. Therefore I will use RSI for representation.
The RSI is overbought
Usually, when RSI crosses the 70 threshold, it is a sign that the market is in an overbought state. Usually, this happens in a market that is in an uptrend. At the same time, it can be a sign of a downward correction or reversal in the future.
The RSI indicator usually signals overbought when the RSI value is between 70 – 100. If you want to receive a stronger overbought signal, you can adjust the overbought threshold to 80 – 100. This helps minimize the signals. Signs of unnecessary purchases. It also increases their reliability.
Divergence RSI is oversold
When RSI drops below 30, it is a sign that the market is in an oversold state. It is common to see this happen in a market that is in a down phase. At the same time, it could be a sign of a future bullish recovery.
RSI gives an oversold signal when its value is between 0 – 30.
Oversold signals become stronger as the RSI value approaches zero. Observing multiple time frames helps minimize inaccurate oversold signals. At the same time increases their reliability.
What is RSI divergence?
Besides applying RSI levels 30 and 70 to determine overbought and oversold conditions. RSI can also be used to predict trend reversals. Or identify support and resistance levels by analyzing divergences.
RSI divergence is a movement in the opposite direction between price and RSI (determined through highs and lows). But RSI decreases to create a new peak lower than the old peak or the price decreases to create a new bottom lower than the old one.
How to use Divergence RSI in trading
What is the RSI line used in different directions? They are expressed in many forms below:
Divergence RSI determines the future trend
RSI can forecast new trends as follows:
- Uptrend: When RSI exceeds 50 from below. Or when RSI is in the range of 40 – 60 and suddenly crosses this zone to above 60.
- Downtrend: When RSI exceeds 50 from top to bottom. Or when RSI is between 40 – 60 and suddenly goes below 40.
However, this signal does not indicate a specific point to buy or sell in the market. But it can be used effectively in combination with indicators. Examples include atr indicator, trend lines, moving averages (MA), and MACD. The purpose is to promote trading decisions.
Apply the RSI calculation formula in trading when there is an oversold RSI signal
The method applied to BCH/USDT currency pair:
Long-term buying strategy when RSI enters the oversold zone.
This is a new strategy that focuses on using overbought signals effectively. Combining with other indicators to eliminate signal noise will significantly improve performance.
Trade when there is an overbought Divergence RSI signal
The method applied to BCH/USDT currency pair:
Short selling strategy when RSI enters the overbought zone.
When applying the strategy with the RSI indicator, you notice a winning rate of nearly 59%. At the same time, it brings about 50% profit after 68 trading orders.
This is a new method, focusing on using oversold signals with significant effectiveness. By combining with other indicators to eliminate noisy signals. Will definitely optimize the performance of the strategy.
What are the common mistakes when using the RSI line?
With the above uses, traders are also prone to making mistakes when using the RSI line. So let’s join Forex Trading to find out what the mistakes are when using the RSI line so that trading can go smoothly!
RSI indicator for Traders
Many traders use indicators mechanically. But it’s important to understand that each indicator has its own meaning. If you do not understand clearly, you may make mistakes in trading. With RSI, a big mistake is often opening an order right when an overbought/oversold signal appears.
When you receive an overbought signal, you should execute the order immediately. Typically, when the RSI reaches 70, the market is considered overbought. But in reality, the overbought zone lasts from 70 to 100. So, if the price continues to rise and crosses the 70 level. Especially going between 75 and 80, your sell order may be triggered.
See more: Exness – Trade With The World’s Leading Broker Exness
Similar to when RSI enters the overbought zone when RSI falls below 30. It is not certain that your buy order will not be canceled. Because the price could continue to fall deep to levels between 20 and 0.
For Holder
There are some investors who use the RSI index to determine when to trade what is scalping trading. One of the approaches is when RSI reaches overbought levels (70 – 80). They will wait for the market to ‘cold’ again before making a buy order.
Although it is not wrong, it is necessary to consider the current market position. During the bullish phase, waiting for RSI to cool down is almost difficult. Maybe it will stay at 70 – 80 or even near 100 for a week or two.
Of course, it’s impossible to keep stocks at overbought levels forever. There will come a time when a correction is needed and the RSI begins to fall to around 50 – 60. However, in reality, buying stocks when the RSI is at 70. But in the last 2 weeks, usually yields results. better.
The worst situation is when waiting for a while. But RSI did not decrease, the price continued to increase continuously. That is when confusion and fear of missing out on opportunities will arise, influencing trading decisions. And thereby creating a generation of investors chasing new peaks.
Conclude
Trading signals using RSI are often very effective if you understand them and know how to combine them with other indicators. As seen in the simple strategy we discussed earlier, the effect is quite good. Create a strategy that suits you. An experiment to determine which strategies work best during your trading. Above is the information Forex Trading wants to provide about Divergence RSI.
Frequently asked questions regarding Divergence RSI
Which type of Divergence RSI is most important?
Divergence RSI can be divided into two main types: Bullish Divergence and Bearish Divergence. Both types make trading sense, however, traders are often more interested in potential reversal signals generated by Bearish Divergence, as they can indicate weakness in the trend. increase.
What are the ways to confirm Divergence RSI?
Although Divergence RSI can provide a potential signal, it needs to be confirmed by other factors to increase its authenticity. Traders often use other tools such as price charts, other technical indicators, and support and resistance levels to confirm what the RSI line signal is.
Is it necessary to use Divergence RSI in all trading situations?
Although Divergence RSI can be a useful tool in technical analysis, it is not always guaranteed to generate accurate signals. Traders need to consider and combine it with other elements of technical analysis and risk management appropriately.