A Dictionary Of Basic Indicators In The Forex Market (RSI, EMA)

Investors are constantly looking for newer and better indicators, aimed at describing the market situation as accurately as possible and giving accurate buy or sell signals. One of the most basic and commonly known are moving averages. In today's article, we will also learn what the RSI really does, how to understand its indications.

The Relative Strength Index (RSI)

Among the many tools available to traders, the RSI oscillator is one of the most used technical indicators for both beginners and more experienced traders.

Its practicality and ease of use make it a valued tool used by Forex traders and other markets.

The relative strength index called RSI (Relative Strength Index) is one of the most popular indicators used by traders. As the name suggests, the RSI provides information about the strength of the price movement on the chart.

How to calculate the RSI is shown in the formula below:

RS = average of N closes up / average of N closes down

Relative Strength Index = 100 - (100 /1 + RS)

The standard setting of the RSI is 14-periods, which means that the indicator takes into account the values of the last 14 candles or time periods.

For example, if all 14 candles were bullish, the RSI would read 100. However, if all 14 candles were bearish, the RSI would read 0 (or relatively close to 100 and 0). However, when the RSI is 50, it means that the last 7 candles were bullish, 7 were bearish, and the value of the average profit and loss was the same.

How to interpret the RSI?

If the RSI oscillator is 70 or higher, it is assumed to be overbought and also indicates that prices do not have cumulative relative strength. This is a situation where prices have surged - more than the market expected, and the move is likely to subside.

An RSI index of 30 or less, on the other hand, is taken as a signal that the instrument may have already sold out, and also indicates that prices have accumulated relative strength. In this case, it is a situation where prices have fallen more than the market would expect, and the movement may be losing strength.

The RSI indicator oscillates around the level of 50 - it means that there is no trend in the market. Level 50 is the midline that separates the bullish and bearish territories of the indicator.

Crossing levels 30, 50 and 70 gives signals to enter into a trade.

Contrary to many opinions, the Forex RSI indicator is a leading indicator. Whether you use the RSI to determine strength, find reversal points, or trade breakouts, the RSI is a versatile weapon in the trader's hand. This helps the Trader to decide whether to follow the trend or not and monitor the trend reversal to change direction.

Exponential Moving Average (EMA)

The exponential moving average is an extremely helpful tool for identifying trends. The trend is found by calculating the average value based on the historical data of the asset. There are several types of moving averages.

The most basic is the simple moving average (SMA), which treats all previous price values equally and calculates the average on their basis. On the other hand, EMA, or exponential moving average, gives more importance (weighting) to newer data and less to older values.

Formula:

EMA = Closing price x multiplier + EMA (previous day) x (1-multiplier)

The exponential moving average is based on a weighted average whose weights are not changed linearly but, as the name implies, exponentially. This average assigns more weight to recent values than to older values. For example, if we count EMAs from the last 20 periods, then the price from the oldest period will be the least important when calculating the current average value.

The exponential moving average helps us spot the trend, and using it properly can be a good source for taking short or long positions in the market.

However, keep in mind that moving averages are indicators that rely on past data. Unlike the SMA, however, the EMA reacts faster to new data because more weights are assigned to the current data.

To sum up, simply speaking EMA is;

• an indicator that follows a trend based on past prices
• calculated by selecting a specific period and dividing it by the number of periods
• helps to smooth out price behavior

Moving averages are used not only to identify the direction of the market, but also to determine where to take a position.

Source: investopedia.com,