Another popular indicator, along with the Makdi indicator, is the Relative Strength Index or RSI, which is widely used by analysts.
The Relative Strength Index is designed and developed by Wells Wilder, which is a family of oscillators and, like the MacDaE indicator, uses a moving average in its calculations, in which the calculation period is variable, which by default And the standard is 14 days. This indicator is an indicator to study the market momentum (trend) and its momentum, which some sources consider as a leading indicator, but due to the oscillating nature of this indicator, it is better to consider it in the family of delay indicators.
What is the market trend (Momentum)?
Momentum is a concept in physics that examines the power and acceleration of a moving object. In fact, the momentum states that a moving object has the ability to continue in the same direction until a foreign object blocks its movement or changes its direction.
Momentum = mass * velocity
In the picture above we see a very good example of the concept of momentum; Bullets infuse each other with momentum, and these momentum continue to move until an external force prevents them from moving or discharges their energy.
Let us give the same example of RSI and the capital market; Prices are always moving in a certain direction and follow their trend until an external force changes direction. This issue is also related to the principle of trends in technical analysis and states that past trends may continue for a certain period of the future.
The Relative Strength Index examines the buying and selling power of a trading option by examining a specific time period, which is a standard 14-day period, and shows it in a chart with three different intervals. As mentioned, RSI is an oscillator and it oscillates between two levels of 0 to 100.
Also in between, very important levels are defined that level 0 to 30 is registered as the sales saturation area and level 70 to 100 as the buy saturation area.
Sales saturation zone and purchase saturation zone
In the above explanations, we mentioned that power and acceleration in a certain direction will change direction with the arrival of an external force or with the discharge of energy. In the RSI indicator, there are two areas called buying saturation and selling saturation, which indicates the slowdown and the end of extreme trades. In other words, when we reach the area below 30 in the RSI indicator, we gradually see a decrease in extreme sales in the market and the purchasing power in the market will probably increase, and when we are in the area above 70, the extreme purchases are probably over and we expect To reduce the pressure of buyers and see a strong supply in the market.
How to get the right signal from RSI?
We got acquainted with the RSI indicator and checked its levels. We have described two very important levels that are exactly the basis of the RSI signal and play an important role in this indicator.
Purchase signal: Sometimes in the market, we see the unattractive price for buyers and also the haste of sellers, in which case there is a situation where extreme sales occur in the market and with a large volume. Under these conditions, the RSI chart breaks the level 30 over time and shows an index below 30.
After the fluctuations of the RSI index below the level of 30, the extreme sales will weaken over time, and conditions will arise that the buyers’ desire to enter the market will increase again; Under these conditions, the RSI will start to rise and will issue a buy signal when the 30 level is broken from the bottom up.
Sales signal: Increased demand and the entry of heavy liquidity into the market will gradually increase prices, and this trend will continue as long as prices are attractive to buyers. Rising prices and declining extreme purchases create a situation called saturation, in which case the big capital giant will gradually sell, and lower prices will become more attractive as buyers in the market decline. They say that this will reduce the price of the investment option. In this case, the RSI index will begin to decline in the buy saturation area (above 70) and the failure of the 70 level will not be good news for the holders of this stock, which means the high desire of investors to sell more.
Divergence in RSI
This indicator is one of the best indicators for detecting divergence, and if they agree with Makdi on the weakness in the trend, we should most likely see a price return. Divergence in RSI occurs when we see a mismatch between the price chart and the RSI chart, in which case we see a weakness in the trend that may completely change the direction of price movement.
Trend line on RSI chart
One of the techniques used by some analysts is the technique of drawing the trend line on the RSI indicator, in which case they receive signals from the return areas or the break of the trend line.