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Relative Strength Index - RSI

Another absolutely phenomenal momentum indicator is the Relative Strength Index or RSI. The indicator moves between 0 and 100, but the most interesting levels are the 30 and the 70, which indicate oversold or overbought markets. The RSI illustrates the comparison between the average high and low close prices for a given time period. The formula is rather pointless, so we will skip it. However, what is important is how does this indicator fit a proper trading strategy. The RSI is suitable for every time-frame, but we really like to use it with the four hours and daily charts. However before a trade you should confirm the signal via a shorter time-frame chart, maybe a one hour or 30 minutes chart.

Forex RSI


Use in Forex

The first method here is a combination between a divergence and the 30 or 70 levels. The RSI is rather slower than the Stochastic and it is also more reliable, but we recommend using both for maximum results. Let’s say that our RSI is in the above 70 level and we have an overbought market. This is not a signal for anything yet, because the RSI can remain in this zone for quite a long time, if there is a strong price trend. If the RSI starts leaving the 70 zone, this is a signal for sell, but don’t rush in, because this may be just a minor price correction. However, you could open a sell with the stop loss nearby. But we have another suggestion – wait for a divergence. If you notice a divergence and the RSI starts leaving the 70 zone, then you have a pretty sting sell signal. Keep in mind that it is a best practice to double-confirm your signals with the Stochastic and with the RSI on a different time-frame.

Another great method is to draw trend lines on your RSI. If the trend lines remain intact, then you have a strong price trend, but that is not so impressive. Use the trend line as a regular price trend line. The RSI is able to spot a possible reversal in the price a couple of candles before the price chart itself. This way you can place a proper order. For best results we recommend using this feature on bigger time-frames, like a daily chart.

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Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.