One of the most popular momentum indicators, RSI is especially popular with novice traders. It’s quite simple to understand, and you can learn how to use it very quickly, but it’s still an incredibly useful tool when applied the right way. In this article, we’re going to explain how RSI works, when you should use it, and which settings are best for day trading.
What is RSI
RSI stands for Relative Strength Index, and it is one of the most widely used basic oscillators used for quick assessment of the price strength. RSI shows you how quick and strong any recent price change was, and it can be used to determine which assets are overbought or oversold. The indicator is shown under the main price chart and looks like a simple line in a certain range (from 0 to 100 by default).
With the default range settings, an asset is generally considered overbought when RSI hits 70. That is a signal that the price is too high and may soon go down. And when RSI sinks below 30, it is probably a sign that the asset is oversold, and its price will rise in the next period. While the indicator can’t give you an absolute guarantee, the rule of thumb is this: the closer it gets to the edge, the more probable the price reversal will be.
Best RSI settings for novice traders are the basic ones. The indicator ranges from 0 to 100, and that’s the most popular interval shown in many educational materials. The period value is set to 14, which is the amount of previous candlesticks used by the indicator. The more periods are shown, the smoother the line gets, but it tends to change slower. The less periods are used, the quicker RSI reacts to price changes. However, it becomes less trustworthy in general.
You can also change the price type in the settings. The indicator uses the Close price by default, but it also offers you to analyze the High prices. There’s an option to use alternate visual styles for the chart line as well. All in all, shorter periods are more suitable for day trading, and longer periods are suitable for discovering long-term trends.
Changing the RSI settings wisely may allow you to analyze the price movements more effectively. The right settings largely depend on the asset you’re trading. For example, if you notice periods of unusual volatility on the market, it would be a promising move to try and adjust the indicator to such short-term trends by changing the interval and the RSI period value.
The author of the article, Oleg Tkachenko, published an interesting post in his account, which we recommend you read.