The fundamental behavior of Relative Strength Index
To understand the behavior of RSI indicator in greater depth, is to look at the theoretical aspects of formation of waves Elliott.
Often, the study was postponed to a schedule, by adjusting the parameters, while not understanding how there are some trading signals. Advanced traders can go further and deeper into the mathematical formula tool. But the fundamental behavior of the indicator is not understood well enough.
This article will help you understand the RSI indicator is better thanks to the original approach. The basic concept of Elliott wave theory is that market action is accompanied by reaction, and there are 5 waves of the main trend, followed by a 3 wave correction. Since this model has been repeatedly observed in the markets, there will be a theoretical schedule, based on these principles, to be able to analyze the relative strength index, without interference from the market «noise», obscures its fundamental behavior. Different characteristics can be found in the study of 7-periodnogo Relative Strength Index (RSI), applied to the academic schedule.
1. RSI moves above 50, to a lesser level of wave 1, but remains below the level of 70.
2. The smaller wave 2 may cause RSI briefly back down below 50.
3. The smaller wave 3 RSI is higher, often up to the values in the region of 80. In the real market value of the indicator will often reach a level of 80, but rarely 90. It is important to understand that the smaller wave 3 is RSI in its highest peak!
4. The smaller wave 4 causes RSI moved below 70 from its high peak, but remain above the value 50. This intersection is a false signal to traders who are too often come across. The opening short position due to the spread of the peaks of wave 3 is premature, and a stop order placed immediately above the top of wave 3 will be vulnerable when the final push to the summit, to a lesser wave 5. The psychological tendency is that most traders ignore the signal in the 5 wave because of the unsuccessful attempts made in wave 3.
5. The smaller wave 5 is yet another reason for increasing the RSI, which often crosses the back to level 70, but the market is short of the length of the trend to raise the RSI to a higher maximum. When the RSI turns and crosses the 70 level for the second time, then it is a signal for opening a short position. Important note: look for divergence, where the price of the new peaks, but the indicator fails to do so. Divergence between the RSI and the price is a very strong indicator of a turning point. Marked divergence in the theoretical graph short blue lines.
Analysis of 3-wave correction lower (blue abc letters):
Summarize:
The process begins again, as the Relative Strength Index is behaving this way for big waves 3 and 5, as it did for the big wave 1. abc correction of a large wave 4 will be like a big wave 2. An ideal place to open a short position after the completion of wave 5, which would lower the wave 2 of the first movement of the new big trend correction. Important Note: RSI Indicator has three turns to the divergence at the end of big waves 1, 3 and 5, marked in red. Facing RSI at the end of the two corrective waves 2 and 4 had no divergence. Look for a model that will help you identify the 5th great wave Elliott. Divergence signals the end of wave 5 of an ideal place to open a short position after the main bottom-up trend or a long position after the main downward trend.
Options bar
Now that the fundamental behavior of Relative Strength Index, as the Elliott waves develop in the market, understand the theoretical timetable will be used to observe the effects of various parameters on the behavior of the period RSI. Setting the period used in the formula for RSI, to calculate the average increase and decrease. Changing this parameter affects the variability of the indicator, as shown below. Important: use the period in which the maximum RSI reaches approximately 80, a minimum of approximately 20.
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