The RSI indicator is a momentum oscillator developed by Welles Wilder for the purpose of measuring the internal strength of security. It captures the change of price movements and the speed of the price. The name of the indicator may seem a bit misleading as it doesn’t really compare the relative strength between two instruments. RSI oscillates in a range of 0 to 100 and Wilder considered the area above 70 as overbought and the area below 30 as oversold. Later, the most famous practitioner of RSI Andrew Cardwell popularized the bull market and bear market ranges.
Advantages & Limitations of RSI
The RSI Forex strategy could use many techniques suggested by Wilder himself. The most popular would be use of the overbought and the oversold area but trading Divergences, asymmetry between the indicator and the price, could turn out to be more effective. A slightly different phenomenon would be the Failure Swing, where a move to the overbought/oversold area is followed by a failure to get back to that area after a pullback. One of the major characteristics of RSI is the formation of chart patterns on the indicator, sometimes much clearer than the price itself and supports/resistances are formed too.