Most successful traders and technicians have their own favourite technical tools and many of them equip themselves with a powerful tool called the relative strength index. This is a single line flexible momentum oscillator developed by j. Welles Wilder in 1978. This oscillator ranges between 0 and 100 value scale. In spite of generated before the era of the computer, this oscillator has a good and reliable indicator of many analysts. therefore, if you want to be like those successful traders and analysts, who ought to know everything about the relative strength index.
Similar to other building momentum, relative strength index to appraises the speed and change movements in the price of any commodity or currency. The main functions of the oscillator that is to see trademarks to identify overbought and oversold conditions and locate bullish and bearish divergences.
Let's take a look deeper about these functions. Firstly, as a trademark, we give you this oscillator buy signal when it moves upwards from the bottom, usually less than 30. On the contrary, when it moves downward from the top, usually over 70, then see a for sale sign. Secondly, a read over 70 channels on the market is overbought condition and a reading below 30 indicates the market is oversold.
On Tuesday, when the relative strength indicator shows successively higher highs, but the value exhibits lower lows we look at connecting a bullish divergence. The opposite situation, which is called a bearish divergence occurs when the relative strength indicator makesconsecutive lower lows but at the same time it remains North and made consecutive higher highs. In addition to these functions, this oscillator also shows the general trend in the market as the direction seen in a chart.
However please keep in mind that the relative strength indicator as a sort of momentum building only will work best when the market is sideways. In other words, you'll likely discover more false signals, when a market simple downward trend. A simple trick to overcome this problem is that you should be able to determine the current trend of the market and the power of the underlying trend. Some tools technical analysis can be used for that purpose as the ADX, an indicator of a trend which is also developed by j. Welles Wilder. When ADX shows a weak trend or flat trend then you can rely on this oscillator and if you have high discipline when trading, you will have higher chance to create a good profit. On the other hand, when ADX declares a strong trend, whether bullish or bearish, you must be more careful when using this oscillator momentum. Alternatively, you can end a situation of loss. So keep on studying and practicing this oscillator.
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