Forex Trading the RSiVery basically, "buy" signals on the RSI are considered to be readings of 30 or less (the security is considered oversold) and "sell" signals are considered to be RSI values of 70 or greater (the security is considered overbought). Depending on the technician and price volatility, there are various other qualifiers and nuances that can be incorporated into a signal when forex trading the RSi.
An overbought or oversold condition merely indicates that there is a high probability of a counter reaction. It is an indication that there may be an opportunity to buy or sell, but does not provide the final signal. RSI signals should always be used in conjunction with trend-reversal signals offered by the price itself. Calculation Relative Strength Index (RSI) measures the strength of all upward movement against the strength of all downward movement in a specified time frame. The mathematical formula for RSI is shown below: RSI = 100 - [100/(1+RS)] The most common parameter for RSI is period 14, although users can pick their favorite period of time if they wish. It is one of the most popular oscillators that works well in range-bound market. Signals Tops and Bottoms These are indicated when the readings go above 70 (top) and below 30 (bottom). RSI can form formations similar to Chart Formations. The RSI may form chart formations that may or may not appear on the actual bar chart e.g. you might see a head and shoulders formation on the RSI but not on the bar chart. Failure Swings Support and Resistance Our Use Of RSI Our favorite use of RSI is that of divergence as suggested by Wilder himself. When the security you are trading makes a new high and the RSI turns down that is bearish divergence. The same is true of bullish divergence. When price makes a new low with the RSI turning up that is bullish divergence as in the 1 hour forex trading chart below: We also prefer to see divergence at major tops and bottoms. That is to say, if we have been in a down trend for some time as shown in the chart above and price has gone past a reading of 20 on the RSI AND we see divergence then we are a lot more confident that price has in fact bottomed.
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If we also have a break of a trendline or it has reach a projection or some other confirming analysis then we would enter a trade. For the purposes of this illustration we will use a break of a trendline to confirm that trend direction has indeed changed. Have a look at the 1 hour forex trading chart below: In the chart above we have the perfect set up as the market showed oversold conditions and divergence on the RSI, price came back up and broke our trendline (orange line) at which stage we would have placed our entry to go long the market. Advanced Trading Rules (Going long):
Conclusion
Thank you for joining us in this forex trading lesson. The Daytradeology Team
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Information, charts or examples contained in this lesson are for illustration and educational purposes only. It should not be considered as advice or a recommendation to buy or sell any security or financial instrument. |