This indicator measures the internal strength of the currency pair's market condition by comparing it's average gain against its average loss over a period of time.
Uses of RSI
1) Extreme Value
- RSI above 70 considered overbought and near a top. But that does not mean the price would not get higher. It may mean that it is time for the price to re-adjust before going up again.
- RSI below 30 is consider oversold and near a bottom. Similar concept goes for this.
2) Value 50 as Centerline
- If above 50 consider bullish
- If below 50 consider bearish
3) Divergence warning
- This is a very important in RSI as it signal an advance warning of the market sentiment.
As the picture shown below, At the price is showing a higher peak to peak but the RSI is showing
a lower peak to peak. We call this a bearish divergence. Which means downtrendis coming.
If the other way round, the price is showing a lower peak to peak but RSI is showing higher peak to peak.
We call that a bullish divergence. Which means uptrend is coming. The common value set for RSI is 14
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