Beginner Guide to the RSI Indicator

in this video we're gonna take a look at the RSI the relative strength index oscillator and how we can use it in a couple of ways to generate trading signals hello I'm David Jones welcome back to this latest video in my series of a trading two-on-two looking at technical analysis and charting last time around we introduced the idea of oscillators typically shown at the bottom of the chart and give us overbought and oversold signals today we're going to look at something in a bit more depth we're going to look at the RSI the relative strength index it's been around since the late 70s so it's probably one of the more established oscillators it's pretty simple and I'm all in favor of keeping stuff simple but there are a couple of ways we can use this to generate potential trading signals so first of all before we look at how it works in the real world let's just go to the formula how this thing is actually calculated so for those of you who are fans of the maths here's the calculation for the RSI so the RSI is 100 minus 100 over 1 minus R s so what is RS in this equation let me explain because this is really at the core of the RSI so RS is the average of X number of days up divided by the average of X number of days down so to put that into plain language let's say we're using a 10 day RSI so it looks at over the last 10 days how many days did the market finish up and it adds the total points gained on those up days and divides it by 10 so we have an average of the points gained when the market went up and of course the inverse supply is down here if the last 10 days the market went down for 4 of them the number of points lost in those 4 days are added up and divided by 10 and we end up with an average ok and once this gets posted on the chart we always have a value between zero and a hundred percent so there's the formula for the RSI you don't need to remember it there's not gonna be a test at the end most software will just produce this and put this on the chart automatically but it's first of all how it works in a real world on a real market looking at just the overbought oversold signals and how good or how bad they might have been so let's start with a nice clean chart we've got pound u.s. dollar zero spread daily candlestick each canister represents a day's worth of trading nothing else on the chart let's add our RSI so we access the RSI from the indicators tab up here we can click down we can choose oscillators and scroll down and pick relative strength index but it's also in the most popular because it is one of the most popular click on manage strength index here we go so it defaults to the textbook version 14-day RSI me I like a ten-day RSI because it's two weeks we can change the overbought oversold areas for now let's let's stick with the textbook 70 and 30% click on confirm and the RSI gets plotted on our chart let's just stretch that up so traditionally with the RSI we always have a value between zero and a hundred percent anything above seventy percent so above this line here the market is said to be overbought anything below thirty percent so down here the market is said to be over salt when the RSI stretches into overbought like just up here pam US dollar back at the end in November was the last overbought signal it's a suggestion that maybe the strength has gone a little bit too far if we jump back to some of the the oversold signals probably the best the truest one we had was down here it's suggesting that maybe the market has gone down too far and is due a bounce back it's not perfect like all these indicators no no perfect but it gives us a way of taking the temperature of the market now if I change this to an hourly chart my RSI is still there of course but now rather than looking at the last 10 days it's looking at the last 10 hours of price so we have a much choppier RSI okay so obviously if you change the period of the chart you're going to get different signals because you're looking at a different price data let's go back to a daily chart for now so at the moment at the time of recording this the RSI was was pretty much in the middle trading around the fifty five percent mark okay but it's at the extremes if we're using overbought oversold where people will be looking for the RSI to try and confirm maybe what they're reading of the chart or the news or the fundamentals is telling them so looking to sell when the market or when the RSI approaches overbought and then looking to buy when it approaches or dips into oversold is one strategy but because markets do move around obviously you do get quite a few overbought oversold signals and they're maybe not as reliable as another way of using the RSI and that's looking at the idea of divergence don't forget the RSI is just a calculation based on what the markets been doing it's not some magic formula so it's based on what's going on in the market broadly speaking it will follow the market but when it doesn't follow the market that's when we can get different signals and this is divergence so let's take a look at that again in the real world I think this idea of divergence is a powerful one clearly as markets move around we are going to get overbought oversold signals it's the nature of market volatility but these divergence signals are a lot less common so arguably a bit more reliable the best example I can see here they don't happen that often like I say but we go let's go back in time to June so you can see this is pound u.s. dollar again the market slips lower rallies but slips lower again okay so that we've got lower lows but look at what the RSI is doing hits a low market bounces back drags the RSI up hits a low again but we've got higher lows so this is a suggestion true as it turned out that maybe this weakness is running out of steam so this is known as bullish divergence let me see if I can find an example of bearish divergence so I flipped this chart to dollar yen notes with dollar yen zero spread again a daily chart again ten day RSI so we have the usual overbought oversold so it goes on it it's not work too badly the last oversold signals were down here for dollar yen third week in November but what I'm looking for is bearish divergence where the market has pushed to a high pushes a little bit higher court the IRS is doing so the RSI blips briefly into overbought market sells off drags the RSI lower but the RSI pushes higher no sorry the market pushes higher and the RSI let we've got our lower high so that's a suggestion that maybe the strength is running out of steam and again in this case it worked pretty well so it's where the market pushes out to fresh highs for the up move but the RSI doesn't follow it that's our bearish divergence setup so there's bullish and bearish divergence that personally is my favorite way of using the RSI these signals don't occur very often so you have to be a little bit patient which is a problem I think for a lot of us but it does give us I think some obvious levels if we're following these signals to put the stops in I mean let's talk about that because this is all about using these to trade it's not using them academically and we all want to have an idea well where should we get in and where should we get out and I think the good thing with the divergence if we look at bullish divergence we have two higher lows so if we're buying because there's bullish divergence we have two obvious levels to place our stop loss beyond because by definition if the divergence is going to work out bullish divergence the market shouldn't take out that prior extreme low so we have a very sensible point I think to place the stop-loss so potential low risk but a potential high reward trade so that's the RSI it is the most simple one I think out there when it comes to us Lakers we'll look at a few more in the weeks to come but there is no perfect system there's no magic system that's right all the time so I think the RSI is as good an oscillator as any of them particularly if you're looking at this this idea of divergence because it does filter out I think so many of just the normal choppy signal so and but try it out see what you think if you have any comments or questions leave us a message in the comments down below we do read them all if you like the video click on the thumbs up and as usual if it's the first time you've seen this we do lots of different videos on goals oil foreign exchange pairs breaking through all the jargon in financial markets all this sort of stuff so regular videos on a weekly basis if you're not subscribed click the SUBSCRIBE button there and you'll get notified when our next video gets uploaded but for this week from me David Jones and trading two-on-two we'll leave it there and I hope you have a good trading week

Channel: Trading 212

Views: 1,444,590

Rating: 4.9385314 out of 5

Keywords: Trading tips, trading signals, trading education, trading course, trading expert, trading lesson, online trading, forex, stocks, support, resistance, RSI, MACD, moving averages, oscillator, trend, trading, investing, online broker, trading app, technical analysis, charting, chart expert, relative strength index

Id: rgVdgR1y1Dg

Length: 9min 5sec (545 seconds)

Published: Thu Dec 21 2017