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RSI - Relative Strength IndexWhen I look at a new technical analysis indicator it makes absolutely NO sense to me until I've read up quite thoroughly and done a bit of backtesting and a bit of trial testing with my demo account. The RSI (aka Relative Strength Index) The Relative Strength Index (RSI) is a popular momentum oscillator which calculates a number between 0 and 100. It works by calculating the recent gains The Calculation The formula for the calculation of the RSI is actually pretty simple: RSI = 100 - (100/(1+(SUM OF POSITIVE CLOSES / SUM OF NEGATIVE CLOSES))) You obviously need to replace the sum of parts with the actual sum of the respective closes for the particular time period. As with Moving Averages, and CCI, the more time periods you use the smoother and longer term the resulting lines will be. How to use the Relative Strength Index Using the RSI is pretty damn simple, RSI returns values between 0-100 though mostly they lie between 30 and 70 (you should test this on the currency or stock you are analysing). The closer the RSI comes to 30 then the more oversold the currency or stock is, meaning it's probably a good time to close your short positions and open a long position. When the RSI gets close to 70 it means that it is overbought and will probably drop soonish so close down your long positions and go short. My Impressions I have done a little bit of backtesting and the RSI has proven to be quite good. So much so that I think I'll be using it in conjunction with the CCI from now on. From what I've noticed the RSI seems to provide much earlier indications of what is coming up. I'm currently running a test on the AUD/JPY which I opened while the chart was still looking like it was falling like crazy though the RSI was below 30. After opening the trade it kept dropping a little more though has since swung and I'm now about 12-15 points up, have set my take profit just below the 50% fibonacci retracement (no logical thinking behind it just a wild guess). I will keep you all updated on how it goes and any future thoughts about the RSI as a technical analysis tool.
An update with some more impressions As you can see by reading this blog post, I've had some nice success using RSI as an indicator. One thing that I have noticed is that you should probably wait for the RSI to be either horizontal or you can see that it has turned before opening a position, otherwise you might experience some losses until it does turn (I've made that mistake).
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