The Relative Strength Index (RSI) is among the most used forex trading technical indicator in technical analysis due to the precise signals that the indicator is able to generate thanks to its statistical nature. The calculation of the RSI is in fact based on the correlation between “positive” and “negative” days which results in an indicator with values between 0 and 100. The oversold area corresponds for levels below 30, while the overbought area corresponds to the area above 70. The neutrality area is around the value of 50.When the RSI is in the overbought area, or is about to enter it, it indicates a bullish price phase, vice versa when it is in an oversold area the indicator suggests a downward phase. A prolonged stay in the oversold or overbought values of the indicator generally indicates a possible trend reversal, especially if accompanied by graphic divergences, that is when the trend of the graph is not reflected in the values indicated by the RSI. The RSI indicator is not generally used alone but is accompanied by the MFI (Money Flow Index) which is nothing more than the RSI weighted for the volumes (if the Broker allows the use of statistics). In the event of the impossibility of using the MFI, the RSI is often accompanied by the ADX or the crossing of moving averages. In the graph below it is possible to see how the RSI has followed the trend of the Euro-Dollar exchange rate, moving towards the overbought and oversold areas in the cases of respectively a rise and a fall of the EurUsd. Note how on the right side of the chart, the RSI does not always enter the oversold area but sometimes comes out remaining just above it.
In cases like these, the trend reversal is generally difficult since the indicator signals the persistent weakness of the financial instrument analyzed. When the values of the RSI mark a peak in the overbought or oversold areas, it could instead be in the presence of price rebounds (as denoted by the maximum price peak of the Euro-Dollar exchange in the graph below).