The relative strength index (RSI) is a technical analysis indicator that uses the average daily losses and gains for a period to determine when a currency pair is overbought or oversold. The RSI doesn’t focus how big a loss or gain occurs on a single day, rather it takes an average of the gains on the days where the pair is up and divides by the average on the days with losses. The RSI is calculated in two stages:
RS = (EMAup/EMAdown)
RSI = 100 – (100/(1+RS))
The RSI for any currency pair oscillates between 0 and 100. When the RSI is above 70, the currency pair is considered to be overbought. When the RSI is below 30, the currency pair is considered to be oversold. The RSI calculation is a simplified version of the long form calculation. Most traders do not manually calculate RSI as many trading platforms can automatically generate the RSI for a standard number of periods. The RSI can also be used to establish trendlines, rather than using the price action chart.
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