What Is RSI (Relative Strength Index)?

In Forex (foreign exchange), RSI stands for relative strength index. But what exactly is RSI? RSI is a measurement of whether the market is overbought or oversold. This particular index is a gauge of extremes. While a high RSI shows that the market is overbought, a low RSI presents an oversold market. Because the RSI stretches from one extreme to another, it is considered a wide oscillator. Aside from swinging from one extreme to the other, it can show any divergence in data. If the swing is not as uniform, there is a sign of divergence. Therefore, RSI is also used by traders to observe and study patterns by which they can make their trading decisions.

The point system of RSI
In RSI, you get indices from 0 to 100. If the market is overbought, the numbers range from 70 to 100. On the other hand, if the market is oversold, numbers range from 0 to 30. Rapid RSI changes or lingering on oversold or overbought positions can serve as significant patterns that traders can look at.

The importance of RSI
RSI is important in gauging the foreign exchange market as this provides patterns that traders can rely upon when making buy, sell, or hold decisions. Though the RSI seems to be nothing more than a number, it is a great indicator of the status of the market especially if the numbers are falling within a certain range. When the numbers are within a particular range, RSI is much more accurate. RSI, however, can provide less than accurate results when the market is following a particular trend – in short, trending. Even with the possibility of inaccurate results, RSI remains one of the most trusted generators of foreign exchange market patterns. Traders can easily spot an extreme status or a divergence.