Lesson 3: Relative Strength Index

Reading RSI Signals

Overview

  • The Relative Strength Index is straight-forward to interpret, and produces very clear trade signals.
  • The RSI scale has two defined regions - the first one starts at 0 and goes to 30, while the second region covers the scale from 70 to 100.
  • According to Wilder, an RSI value falling within the 0 to 30 region is considered oversold. Traders assume that an oversold currency pair is an indication that the falling market trend is likely to reverse (i.e. a bullish signal) and is treated as a buy opportunity.


Relative Strength Index oversold condition
Relative Strength Index showing oversold condition
  • On the other hand, an RSI value falling into the 70 - 100 region of the scale, is regarded as being overbought.
  • This signal suggests that the resistance level for the currency pair is near or has been reached and the rate is likely to fall; traders would interpret this as a sell (i.e. a bearish signal) opportunity.


Relative Strength Index overbought condition
Relative Strength Index showing overbought condition

Centerline Crossovers

  • In addition to the overbought and oversold indicators described above, technical traders using the Relative Strength Index also look for what is known as a centerline crossover.
  • A rising centerline crossover occurs when the RSI value crosses over the 50 line on the scale, moving towards the 70 line.
  • A falling centerline crossover occurs when the RSI value crosses under the 50 line towards the 30 line.


Relative Strength Index centerline crossovers
Relative Strength Index showing Centerline Crossovers

A rising centerline crossover indicates increasing strength in the market trend and is seen as a bullish signal until the RSI approaches the 70 line (i.e. the overbought region). A falling centerline crossover is an indication of weakening strength and so long as the value does not drop below 30 into the oversold region of the scale, is considered a bearish signal.

Lesson 3 Topics

This is for general information purposes only - Examples shown are for illustrative purposes and may not reflect current prices from OANDA. It is not investment advice or an inducement to trade. Past history is not an indication of future performance.

Trading FX and/or CFDs on margin is high risk and not suitable for everyone. Losses can exceed investment.