We learned to analyze the price chart presented by candlesticks. On the chart we meet the trend and lateral price movement. Checking our results on price chart analysis, we can use trend indicators and oscillators. Trend indicators work well when there is a trend, although their signals lag a little behind the price movement in real time. Oscillators give leading signals in case of lateral price movement. So today we want to look on how use oscillators for determining trend. But first, we need to know what is an oscillator? An oscillator is a system subjected to periodic oscillations.
Let’s get started and go to the BitSeven platform at www.bitseven.com, and select the Leverage Trading tab. Then open the “Indicators” tab. Today we will look closer at RSI oscillator, Relative Strength Index. The context menu allows us to change the value of the parameters of this oscillator. By default, the oscillator analyzes the interval of the chart for 14 candles.
For a better understanding of the principle of operation of this tool, we will study the following parameters:
Oversold and Overbought zone.
These parameters are familiar to us from our previous lesson and on the RSI chart they correspond to values less than 30 or more than 70, respectively. This is the main parameter of the RSI, which is based on the rate of change of price and gives leading signal about a possible trend reversal.
This is a situation when the price movement on the chart and the RSI signal are directed in different directions. It indicates the continuation of the trend or its reversal. In practice, it looks like this: on the price chart we see an update of the MINs and MAXs of the price, but they are not on the oscillator chart. Or we see the opposite situation.
The situation when the price moves down and the RSI signal goes up is bullish divergence. In the opposite situation, we observe a bearish divergence. If the subsequent price changes correspond to the RSI indicators, we observe a direct divergence. In the other case, we observe reverse divergence.