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in today's video we will talk about the relative strength index indicator.
The RSI indicator is a technical trading tool that falls within the oscillator family.
The RSI indicator is considered a leading indicator, which means that its signals typically
come prior to a price event on the chart.
The positive side of this is that we are able to attain early signals for our trades, but
the downside is that many of these signals can be false or premature.
Therefore, the RSI should always be used in a combination with another trading tool or
technique for confirmation.
In this video, I will dissect the RSI indictor and give some best practices for trading with
it.
The RSI trading indicator is a measure of the relative strength of the market, is a
momentum oscillator and is often used as an overbought and oversold technical indicator.
Structure of the RSI Indicator The indicator usually attaches to the bottom
of your chart in a separated horizontal window.
The Relative Strength Index technical indicator consists of a single line, which fluctuates
between 0 and 100 area.
The area is separated based on three primary zones:
From 0 to 30: it’s called Oversold Area From 30 to 70: it’s called Neutral Area
From 70 to 100: it’s called Overbought Area The RSI line moves in and out of these three
areas creating different signals on the chart.
The default RSI setting is typically 14 period.
oversold and overbought areas: • If the momentum in price movement is increasing
to the upside, an over extension will lead the oscillator into the overbought zone, generally
the 70 level.
It’s at this point, theoretically, the traders will see the extension in price and begin
to unload long positions.
At this point as well, counter trend traders will look to short the market.
• If price momentum is to the downside, the RSI can reach the 30 level and at this
point, theoretically, traders will see a market that is oversold and sellers will look to
take profits.
Other traders with other methods and thoughts about price will look to buy into the market.
RSI Oscillator Signals There are three basic signals provided by
the Relative Strength Index technical indicator.
Since it is a leading indicator, the signals can typically come prior to the actual price
move happening on the chart, depending on what information you use to enter the trade.
The first signal is RSI Overbought Condition The first signal we will discuss is the overbought
signal.
The RSI Indicator gives a signal for an overbought condition when the RSI line enters the 70
to 100 area.
The second signal is RSI Oversold Condition The oversold RSI signal appears when the RSI
line enters the 30 to 0 area.
When the RSI is oversold, it implies that the price is likely to increase.
The third signal is RSI Divergence Signal There are two types of RSI divergence Signal:
Bullish RSI Divergence – When Price action is decreasing while the RSI line is increasing;
this is a strong bullish signal on the chart.
Bearish RSI Divergence – When Price action is increasing, while the RSI line is decreasing;
this is a strong bearish signal on the chart.
RSI Analysis in Forex RSI Analysis in Forex consists mainly of recognizing
the signals described above.
We will now illustrate each of the signals so you will get a better sense of how to analyze
your chart using RSI.
Simple RSI TRADING STRATEGY Before we dive into this strategy make sure
that, The RSI indicator is not great as a standalone tool and can give many false signals.
Therefore, you should add another tool or study on the chart to filter fake signals.
A good way to do this is by using price action rules and chart analysis.
Using the RSI indicator in isolation will not likely create a profitable trading strategy
over the long run.
As with most other leading indicators, the Relative Strength Index can be prone to giving
false signals.
You should incorporate an approach that will allow you to isolate as many false signals
as possible.
One way is to use the RSI tool in combination with price action to increase your chances
of a winning trade.
You would look to open your trade when you find a RSI signal confirming the direction.
However, you will also confirm the price direction with a price action pattern.
This could be a candlestick pattern or a chart pattern, as well as a trend line, channel,
ascending or descending tops and bottoms, etc.
We will now switch gears and discuss some strategy building ideas with the RSI indicator.
We will use the signals described above to set entry and exit points on the chart using
the basic RSI rules.
Buying Rules 1.
RSI indicator must be in the oversold region, which is below level
30.
2.
When RSI indicator crosses from the lower 30 level to the upper,
this is your buy signal.
3.
Wait for a bullish candlestick to confirm a buy signal and when it
happens, Buy or you can place a buy stop order at least 2 pips above the high of
that bullish candlestick.
4.
place your stop loss 2 or 5 pips below the low of that bullish candlestick but if you
see that it may be too close to the entry price, then place it a bit far away so that
you do not get stopped out prematurely and one way to do this is
to look for the nearest swing low and place yours stop loss a few
pips above it.
5.
For take profit target, you can use the previous swing high or aim for a risk: reward of 1:2
or more.