Relative Strength Index (RSI)

[ScriptBoss]

First of all I want to thank Hybrid solution for the new version (9.1) of VertexFX Online trading system that they enhance the chart and indicator category, after tracing indicators in the new version I saw that after attaching indicator to chart the indicator will adding in new window if this indicator work as a vision with the candle, and if this indicator work with the candle in the same window the indicator will be added with it automatically, you don’t need to drag the indicator and drop it to the candle manually “it’s referred to indicator study”, in this version we will not need to know if this indicator work with the candle in same window or it work independently in another window, we can now full-screen the chart easily by pressing F11, and the noisy speed scrolling was truly enhanced by letting you to scroll the chart by double clicking and hold the second click then surf smoothly through chart.

What is RSI?

“In this lecture I have given, I showing you how the RSI can be used completely independent trading model, and enhancement of a trader’s current technical approach. I use it as a completely independent model to identify trend, support and resistance, overbought/oversold levels, divergence”.

A technical indicator developed by Welles Wilder to help investors gauge the current strength of a product’s price relative to its past performance. The value of this indicator is based on the premise that the RSI will usually top out or bottom out before the actual market top or bottom, giving a signal that a reversal or at least a significant reaction in stock price is imminent.

The RSI oscillates in a range between 0 and 100 representing a comparison of the magnitude of a stock's recent gains to the magnitude of its recent losses.
In mathematical terms,
RSI = 100 - 100/(1+RS)
RS = AG / AL
AG = Average Gain over RSI Period
AL = Average Loss over RSI Period

To simplify our explanation of the formula, the RSI has been broken down into its basic components which are the RS, the Average Gain, and the Average Loss.
Let us start working with RSI indicator, please add the chart you want to make your study on, let us say AUD/USD, by right click on AUD/USD symbol and choose chart choice as you see in figure 1.1.

http://www.forum.hybrid-solutions.com/VTL/RSI/Lesson%201/1-1.jpg
Figure 1.1

Then right click on the Relative Strength Index (RSI) and choose attach to chart as you see in figure 1.2.

http://www.forum.hybrid-solutions.com/VTL/RSI/Lesson%201/1-2.jpg
Figure 1.2

As you see in figure 1.3 the RSI has one line, but this line should move between two line to make our strategy more profitable, the upper line and the bottom line, the two line are depend in you strategy, but as usual I’m using the 70 indicate upper band and 30 indicate bottom band, and there are many technical analysis using my variables. So we will make this tow variable as a standard in our lesson.

Let us make a upper and bottom bands in the chart, from tools tab, upper of the chart in VertexFX there is a horizontal line as you see in the figure 1.3, choose it and assign it in the lower window”RSI window” in chart and be sure that the line is assign in the 70 value, then make another one for 30 value, as you see in figure 1.4 there are two line on in 70 indicate and the other in 30 indicate.


http://www.forum.hybrid-solutions.com/VTL/RSI/Lesson%201/1.3.JPG
Figure 1.3
http://www.forum.hybrid-solutions.com/VTL/RSI/Lesson%201/1.4.JPG
Figure 1.4

[ScriptBoss]

How RSI should work?
The main purpose of the RSI is to measure the market’s strength and weakness. A high RSI, above 70, suggests an overbought or weakening bull market. Conversely, a low RSI, below 30, implies an oversold market or dying bear market.
The daily bar chart is the most common chart expression for the RSI. In addition, you may plot a weekly chart to confirm the RSI indications on a daily chart; weekly charts offer more significance when tracking trending activity.
RSI readings above 70 indicate the shares are overbought and are likely to start falling. Readings below 30 indicate the shares are oversold and a rally can be expected. The time period specified determines the volatility of the RSI. For example, a 9-day time period will be more volatile than a 21-day time span, so will take 14-day time period to study on.
When using Investor charts to study RSI, you can select whatever time period works best for your investing strategy.
Overbought / Oversold
The RSI indicator ranges in value from 0 to 100, with numbers above 70 indicating overbought conditions and under 30 indicating oversold. If the RSI rises above 30, it is considered Bullish (Oversold) as you see in figure 2.1, while if the RSI falls below 70, it is considered Bearish (Overbought) as you see in figure 2.2. These situations can be represented in the following two scans:
Bullish (Oversold)
RSI > 30 AND RSI.1 <= 30
http://www.forum.hybrid-solutions.com/VTL/RSI/Lesson%202/2.1.JPG
Figure 2.1

Bearish (Overbought)
RSI < 70 AND RSI.1 >= 70
http://www.forum.hybrid-solutions.com/VTL/RSI/Lesson%202/2.2.JPG
Figure 2.2

Additionally, the value of 50, can serve the same purpose as the zero line in other oscillators. The slowing down of a current trend or a trend reversal may be signaled by crossing above or below.
Crossing the Center Line (50)
Some trades view a move above 50 as a bullish confirmation, and a move below 50 as a bearish confirmation. A move above 50 represents average gains overtaking average losses, while a move below 50 signifies that average losses have taken the lead. These situations can be represented with the following scans: in Figure 2.3 you will see Bullish Center, and in figure 2.4 you will see Bearish Center.






Bullish Center Line Cross
RSI > 50 AND RSI.1 <= 50
http://www.forum.hybrid-solutions.com/VTL/RSI/Lesson%202/2.3.JPG
Figure 2.3

Bearish Center Line Cross
RSI < 50 AND RSI.1 >= 50

http://www.forum.hybrid-solutions.com/VTL/RSI/Lesson%202/2.4.JPG
Figure 2.4

Some traders look for a move above 50 to confirm bullish signals or a move below 50 to confirm bearish signals.

One point to make is that one should put this indicator into perspective: the fact that it has risen above 70 cannot be construed as entirely bearish, rather it is telling us that the security is making consistently higher closes - a sign of strength. I like to think of the basic "overbought" signal as more of a warning that there is, in the short term, a higher probability of a pull-back or profit-taking rather than a sell signal. The RSI divergence signal below has greater longer term consequences for trend.

[ScriptBoss]

RSI Divergence signals.

Another use of the RSI is divergence. Market prices continue to move higher/lower while the RSI fails to move higher/lower during the same time period. Divergences may occur in a few trading intervals, but true range divergence usually requires a lengthy time frame, perhaps as much as 30 70 trading intervals. When the RSI begins to fall below the trough formed by a double-top, this may indicate a trend reversal and a buy signal. A double-bottom in the RSI with penetration upward may signal an opposite trend reversal and a sell signal.
Selling when the RSI is above 70 or buying when the RSI is below 30 can be an expensive trading system. A move to those levels is a signal that market conditions are ripe for a market top or bottom. It does not indicate a top or a bottom. A failure swing or divergence accompanies your best trading signals.
If the instrument is making a new high, but the RSI is failing to exceed its previous high, this “divergence" is an indication of coming reversal. When the RSI then turns down and falls below its most recent trough, it is said to have completed a "failure swing" and therefore confirmed the coming reversal.

Section 1 - Bearish Divergence:

Bearish Divergence occurs when the stocks price is upwardly sloping, and the RSI is downward sloping. It is an early indication that the stock price is about to break down. Bearish divergence is identified when the security is making a new high, but the RSI is failing to rise above its previous high “The price makes a new high but this high is not confirmed by the RSI indicator which makes lower highs.”
Interpretation:
AUD/USD price continued to rise while the RSI started to trend lower. As you can see in figure 3.1, the trend line on RSI and the trend line on the price chart are inverse to each other. This is a clear sign of Bearish Divergence.
Guidelines:

• When the RSI then turns down and falls below its most recent trough, it is said to have completed a "failure swing". The failure swing is considered to be a confirmation of the price break down.

http://www.forum.hybrid-solutions.com/VTL/RSI/Lesson%203/3.1.JPG
Figure 3.1

Section 2 - Bullish Divergence:

Bullish Divergence occurs when the stocks price is downward sloping, and the RSI is upwardly sloping. It is an early indication that the stock price is about to break out of a decline. Bullish divergence is identified when the security is making a new low, but the RSI is failing to decline below its previous low. The price makes a new low but this low is not confirmed by the RSI indicator which makes higher highs”.
Interpretation:
• Stock price continued to decline while the RSI started to trend higher. Again, you can see that the trend line on RSI and the trend line on the price chart are inverse to each other. This is a clear sign of Bullish Divergence.
Guidelines:

• When the RSI turns up and rises above its most recent low, it is said to have completed a "failure swing". The failure swing is considered to be a confirmation of an upward price break.
• When you have identified “Bearish Divergence“ or “Bullish Divergence” in RSI, you should always validate your findings by applying other technical indicators before you act on an investment (or trading) decision.

http://www.forum.hybrid-solutions.com/VTL/RSI/Lesson%203/3.2.JPG
Figure 3.2

“Which is sometimes called support or resistance penetrations or breakouts”
Support and Resistance; sometimes more clearly than price themselves, levels of support and resistance are demonstrated by the RSI. Divergences; as it was described earlier, divergences happen when the price goes lower (or higher) and it isn't affirmed by a new high (or low) in the RSI. Prices usually reform and follow the RSI. It would be good to read the Mr. Wilder's book, where you could find additional information.

[ScriptBoss]

The VTL scrip help you to back tracing the buy and sell to all points of RSI which attached to chart.


In VertexFX there is ready scrip as an example located in Scrip node in the left tree, or you can create new one using the following steps.
How to use trade script:
1-Please attach RSI indicator to see where the sell and buy points.
2- Right click on the RSI indicator and choose attach to chart.
3- If you want to create a new scrip from begging, go to the script tree node, and write click on the tree and choose create.
4- Write in buy script this code:
#Buy Script:
RSI (CLOSE, 14) < 30

And in the sell script:
#Sell Script:
RSI(CLOSE, 14) > 70

Then attach it to the chart as you see in figure 4.1.
http://www.forum.hybrid-solutions.com/VTL/RSI/Lesson%204/4.1.JPG
Figure 4.1


As you see the report showing you, how much point will be success on this symbol and how many times will be failing, according to your scrip study.


Figure 4.2, showing you the sell points and buy points, the red arrows showing you sell point and the green arrows showing you a buy points. But you have to know that there are some points are not profitable as you expect so you have to be carful and tracing the symbol price or use another indicator to get the good result. Another and profitable, that’s dependent on you VTL study, the report that appeared in figure 4.2 show you the result of your study.

http://www.forum.hybrid-solutions.com/VTL/RSI/Lesson%204/4.2.JPG
Figure 4.2

The conclusion:

When we see that the RSI 'line' crosses above 70 points, the currency pair is considered to be 'over-bought'. This means that the buying pressure has been 'too strong' and that prices are likely to come down again soon.
Conversely, when the RSI 'line' crosses below 30 points, the currency pair is considered to be 'over-sold'. This means that the selling pressure has been 'too strong' and that prices are likely to go up again soon.