The Relative Strength Index indicator, also known as the RSI indicator, is a technical indicator that is commonly used to analyze the market. Because of how easy it is to use, it’s also one of the most popular indicators on the Binomo platform.
In this short article, I’ll explain all there is to know about the RSI indicator.
How does the RSI indicator work?
The RSI indicator is intended to see how strong or weak a certain asset is based on the closing prices of the last trading period. It is also used to determine the probability of a trend reversal.
The RSI is computed as the sum of price growth divided by the sum of price decrease, all within a given period of time.
The indicator shows the resulting data using a scale of 0-100%. An RSI of 100% means that all the candlesticks on that specific period are green. An RSI of 0%, meanwhile, means that all the candlesticks on that specific period are green.
The closer to 100 the indicator it is, the more people are buying a certain asset. On the other hand, the closer to 0 is it, the more people are selling. On Binomo, if the value goes above 80, the asset is considered overbought, and if it goes below 20, the asset is considered oversold.
Overbought and oversold levels are very important because they can be used to speculate impending trend reversals.
Period and overbought/oversold areas
Period refers to how many days’ worth of candlesticks will be used in data collection. The default setting for Period on the Binomo trading platform is 14. This means that candlesticks from the last 14 days will be used to gather the result.
You can also set overbought and oversold values on the platform, although the default values are 80 for overbought and 20 for oversold. The closer the overbought value is to 100% and the closer the oversold value is to 0%, the more precise the signals are.
Using the Relative Strength Index Indicator
It’s easy to familiarize yourself with the RSI indicator, which is why it’s such a popular choice for many traders.
To set up the RSI on Binomo, simply click (1) Chart Preferences on the left-hand panel. Scroll down until you find (2) RSI. You can then change the values for (3) Overbought, (4) Oversold, and (5) Period.
Do take note that outside of the Binomo platform, 70 and 30 are the usual values for Overbought and Oversold, respectively. It’s up to you if you want to change the 80-20 values on Binomo or leave them that way.
In the screenshot above, you can see that the bearish candles accompanied by an RSI level of less than 20 are immediately followed by bullish candles.
Basically, all you have to do is to look at the level of the RSI line. If it intersects on a higher level, which is 80 in this case, that means the asset may be overbought. This means that the prices may be increasing too high or too fast, which could suggest an imminent downtrend. If the RSI line intersects on a lower level, or 20 in this case, that means that assets may be oversold. This means that the prices may be decreasing too low or too fast, which could suggest an imminent uptrend.
You can use these levels to safely speculate what position you’re going to enter next. However, one of the most crucial trading lessons I’ve learned is that it’s not a perfect indicator either, so you should stay on the safe side as well.
Did this guide help you understand the Relative Strength Index indicator better? Feel free to share your thoughts with us in the comments below! And of course, if you want to practice using the RSI indicator yourself, you should also sign up now for a free demo account on the Binomo platform before you jump into the real deal.
Good luck on your trading journey with Binomo!