Relative Strength Index (RSI) measures the strength of all upward
movement against the strength of all downward movement in a specified
time frame.
For mathematical formula of RSI is as follow:
RSI can range from 0-100. In the formula, if RS = 1, which means the average n day's up closes equals to the average of n day's down closes, RSI = 50. In that case, the market is having an equal strength of upward and downward force. If RSI > 50, which means the upward force is stronger than the downward force. If RSI < 50, which means the downward force is stronger than the upward force.
If RSI > 70, the market is considered to be overbought, a selling signal is issued; if RSI < 30, the market is considered to be oversold, a buying signal is issued.
2. Spot Divergence
If the price near support/resistance level and the RSI begin to diverge and are heading different direction, it may signal a weakening of trend.
The occurrence of divergence can deemed to be the weakening of the current trend or a reversal is about to happen.
In the chart below, the price is making lower lows, however, the RSI does not make any lower lows, it lows are going higher and higher. That marks the weakening of the current downtrend.
MOMENTUM
Momentum measures the rate of change of the currency pair.
Momentum = V - Vn
Where
V = latest closing price
Vn = closing price n periods ago
If there is no change of closing price, momentum equals to 0, which is the central line of the indicator. When there is a rise of price, momentum is greater than 0. If the closing price is smaller than the closing price n periods ago, momentum is a negative value. The most common period for n is 14, traders can adjust the value according to their preference.
When momentum reaches upper boundary level, the pair is considered to be overbought. If momentum reaches lower boundary level, the pair is consider to be in oversold condition. Since momentum has no fix range, there is no standard value for the upper and lower boundary. Traders may consider different boundary values for different currencies after a while of observation.
2. Spot divergence
If momentum is at near its boundary and it heads different direction with the price, a divergence is occurred. Divergence may signal a weakening of the current trend or a reversal may happen.
3. Crossing the central line
The cross over of the central line is deemed as a change of direction of the general trend. When momentum crosses below the central line, a sell signal is issued, whereas a cross above the central line, a buy signal is generated.
For mathematical formula of RSI is as follow:
- RSI = 100 - [100/(1+RS)]
- RS = average of n day's up closes / average of n day's down closes
RSI can range from 0-100. In the formula, if RS = 1, which means the average n day's up closes equals to the average of n day's down closes, RSI = 50. In that case, the market is having an equal strength of upward and downward force. If RSI > 50, which means the upward force is stronger than the downward force. If RSI < 50, which means the downward force is stronger than the upward force.
Applications of RSI:
1. Detect overbought and oversold conditionIf RSI > 70, the market is considered to be overbought, a selling signal is issued; if RSI < 30, the market is considered to be oversold, a buying signal is issued.
If the price near support/resistance level and the RSI begin to diverge and are heading different direction, it may signal a weakening of trend.
The occurrence of divergence can deemed to be the weakening of the current trend or a reversal is about to happen.
In the chart below, the price is making lower lows, however, the RSI does not make any lower lows, it lows are going higher and higher. That marks the weakening of the current downtrend.
MOMENTUM
Momentum measures the rate of change of the currency pair.
Momentum = V - Vn
Where
V = latest closing price
Vn = closing price n periods ago
If there is no change of closing price, momentum equals to 0, which is the central line of the indicator. When there is a rise of price, momentum is greater than 0. If the closing price is smaller than the closing price n periods ago, momentum is a negative value. The most common period for n is 14, traders can adjust the value according to their preference.
Applications of momentum
1. Detect overbought/oversold conditionsWhen momentum reaches upper boundary level, the pair is considered to be overbought. If momentum reaches lower boundary level, the pair is consider to be in oversold condition. Since momentum has no fix range, there is no standard value for the upper and lower boundary. Traders may consider different boundary values for different currencies after a while of observation.
2. Spot divergence
If momentum is at near its boundary and it heads different direction with the price, a divergence is occurred. Divergence may signal a weakening of the current trend or a reversal may happen.
The cross over of the central line is deemed as a change of direction of the general trend. When momentum crosses below the central line, a sell signal is issued, whereas a cross above the central line, a buy signal is generated.
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