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Relative Strength Index
This technical analysis tool was created by J. Welles Wilder in the 1970's. You can use it to see the changes in the speed and size of the price. It is a momentum ascillator.
Interpreting the RSI:
The RSI oscillates between 0 and 100 percent. When this number closes in on either extreme this indicator gives off either a buy or a sell signal respectively.
The buy signal indicates that the currency is oversold.
You get this signal
If the indicator crosses below the oversold line, which is 30.
If the price and indicator are both rising and the indicator rises above 50.
The buy signal indicates that the currency is overbought.
You get this signal
If the indicator crosses above the overbought line, which is 70.
If the price and indicator both fall and the indicator falls below 50.
Alternate Buy and Sell Signals
This method uses the 50 line when defining buy and sell signals.
If the RSI rises above the 50 line, you get a buy signal.
If the RSI falls below the 50 line, you get a sell signal.
The most commonly used value for the look back timeframe is 14 periods. But you can actually change this value to either make it more sensitive by decreasing it and less sensitive by increasing the value. A value of 10 periods will be oversold and overbought a lot more times than a value of 20 periods. But the larger value will give you a more robust indications.
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Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.