Page 61 - NEW FOREX FULL COURSE

FOREX TRADING COURSE FOR BEGINNERS

Learning to use this index is a lot like learning to read a chart. The more you study the interaction
between chart movement and the Relative Strength Index, the more revealing the RSI will
become. If used properly, the RSI can be a very valuable tool in interpreting chart movement.
Some of its uses RSI points are plotted daily on a bar chart and, when connected, form the RSI
line. Here are some things the index indicates as shown by examples from the chart

Tops and bottoms — these are often indicated when the index goes above 70 or below 30. The
index will usually top out or bottom out before the actual market top or bottom, giving an
indication a reversal or at least a significant reaction is imminent. The major bottom of Aug. 15
was accompanied by an RSI value below 30. The major top of Nov. 9 was preceded by an RSI
value above 70. The top made on Jan. 24 was preceded by an RSI value of less than 70. This would
indicate this top is less significant than the previous one and either a higher top is in the making
or the long-term uptrend is running out of steam.

Chart formations — the index will display graphic chart formations which may not be obvious on
a corresponding bar chart. For instance, head-and-shoulders, tops or bottoms, pennants or
triangles often show up on the index to indicate breakouts and buy and sell points. A descending
triangle was formed on the RSI chart during October and early November that is not evident on
the bar chart. A breakout of this triangle indicates and intermediate move in the direction of the
breakout. Note also the long-term coil on the RSI chart with the large number of support points.

Failure swings — Failure swings above 70 or below 30 are very strong indications of a market
reversal. After the RSI exceeded 70 during October, the immediate downswing carried to 65.
When this low point of 65 was penetrated the following week, the failure swing was completed.
After the low of Aug. 15, the RSI shot up to 41. After two downswings, this point was penetrated
on the upside on Aug. 26, completing the failure swing.

Support and resistance — Areas of support and resistance often show up clearly on the index
before becoming apparent on the bar chart. Trend lines on the bar chart often show up as
support lines on the RSI. The mid-November break penetrated the uptrend line on the bar chart
at the same time as the support level on the RSI chart.

Divergence — Divergence between price action and the RSI is a very strong indicator of a market
turning point and is the single most indicative characteristic of the Relative Strength Index.
Divergence occurs when the RSI is increasing and price movement is either flat or decreasing.
Conversely, divergence occurs when the RSI is decreasing and price movement is either flat or
increasing. Divergence does not occur at every turning point. On the chart, there was divergence
between the bar chart and RSI at every major turning point. The top made in November was
"warned" by the RSI exceeding 70, a failure swing and divergence with the RSI turning sideways
while prices continued to climb higher.

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