![]() The first RSI graph point is calculated by summing the up periods and dividing the result by the n periods setting in the RSI indicator. ![]() It's also a momentum indicator because its goal is to show traders when momentum could be slowing down. Having a set scale allows RSI to be easily used across any trading instrument. Therefore, the RSI is an oscillator because it goes back and forth on a fixed scale between 0 and 100. So Wilder's formula turns the number into an index that stays between zero and 100. It can be a little tough to understand what that number is actually telling you. The raw Relative Strength number simply shows you how current price compares to historical prices over the last n periods. You will learn more about how the RSI settings affect the characteristics of a RSI trading strategy in parts 2 and 3 of this series. It just depends on what you have tested and what is profitable for you. Your RSI period setting will depend on your goals and your trading strategy. Therefore, I will refer to the RSI look back setting in periods, which is more accurate. It just depends on what timeframe chart you are using the indicator on. The RSI look back can also be measured in weeks, hours or minutes. Many websites refer to the default RSI setting as 14 days, but that's only if you are trading on the daily chart. When the RSI is set to 14, your charting software will calculate the current RSI value based on the last 14 periods. The default value is usually 14 periods, but it can be changed, according to your needs. It's basically the number of periods that you want to look back on the chart to determine the current RSI value. N is one of the settings that you would use in charting platforms like TradingView or MetaTrader. So we created a graphic that clears up the confusion and shows you exactly how the RSI calculation formula works.Īlright, now that you know the formula, let's break down each component…įirst, let's start with the variables. The way that RSI is explained in most books and on most websites is a little confusing. Now let's take a closer look at the RSI… RSI Calculation Formula The default settings for the RSI are usually: ![]() Here's what the RSI looks like on a chart: ![]() That's when countertrend traders can potentially step in and make some money with the RSI indicator. This leads to so-called “overbought” or “oversold” conditions.Įventually, the price momentum will run out and the market will have to move in the opposite direction…at least for a little while. The theory behind the RSI is that buyers and sellers can usually only push the market in one direction for so long. Discount for TH Readers: Get your Forex Tester 5 coupon here ![]()
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