Not long ago I have posted about the Relative Strength Index (RSI). In the post I have highlight some way to use this indicator. Recently I have found out a bit more information about RSI. Here I would like to share out the few more points I have learned.
RSI vs EMA, RSI period
I read this in an article in Currency Traders. It is said that RSI is equivalent to EMA (Exponential Moving Average) two times the period of RSI. This is because the way RSI is being calculated. In the image below, I have plot out RSI 14 and EMA28. Notice that RSI will be below center line when the price is below EMA; and RSI will be above the center line when the price is above the EMA.
The default value for RSI is 14. It is said that the best period for RSI will based on the price cycle divided by 2. If the price cycle is 28 period, than RSI 14 is recommended.
Trend determination
RSI is a momentum indicator; however it can be used to determine a trend too. I learn this from an article by John Hayden. Andrew Cardwell have studied and developed many new usages for RSI. Using RSI to determine trend is one of it.
In and uptrend market, when the price is trending, the RSI will find its support around level 40 and resistance around level 80. The RSI will makes higher lows and highs.
In a downtrend market, when price is trending, the RSI will find its support around level 20 and resistance around level 60. The RSI will make a lower lows and lower highs.
In the example below we have a down trending market, with RSI around level 60 and 20.
Divergence in RSI
I read this in the article by John Hayden. What shock me is this is absolutely opposite from what I read from typical textbook. And what surprise me more is he is absolutely right.
According to John, when bearish divergence happens in uptrend, he will think of Bull Market. In this situation he will be looking for opportunities to go long.
When bullish divergence happens in downtrend, he will think of bear market. In this situation he will be looking for opportunities to go short.
And this is very much correct. Below I have some few example of it.
Here you are, 3 pieces of important information for RSI. Use it wisely and it will bring more earning to you.
