The Relative Strength Index is arguably the most popular technical indicator when it comes to trading. But being popular doesn’t always make you right or easy. At Bulliscoming we know this and are here to give a helping hand to those just starting their journey in the world of the markets, as well as those who’ve had a bit more experience.
He goes over the way it’s calculated, its parameters and default settings and goes on to show it in real examples. There you can see it at peak performance but more importantly – when a bit more attention or caution is necessary to use it properly.
The Relative Strength Index (RSI) indicator is built in the MetaTrader4 forex platform. You can add it to your chart by going to Insert – Indicators – Oscillators – Relative Strength Index. This varies depending on your trading interface. The basic and understandable RSI trading strategy involves the following setups: place a trade the RSI lines reaches some certain levels on the chart. It can be overbought, oversold, or divergence.
Is the Relative Strength Index in Forex any Good?
The Relative Strength Index in Forex(RSI) indicator is a technical analysis trading tool that is categorized among the Oscillators quadrant. The Relative Strength Index indicator is considered a confirming indicator, which equals that its interpretation usually comes before a price effect on the trading chart. The pro side of the RSI indicator is that we are opportune to attain early signals for our trades, but the downside is that many of these signals can be inaccurate or too early.
Does the Relative Strength Index give out conflicting signals?
Due to this reason, the Relative strenghjt index indicator should always be used as confirmation with another Forex trading indicator or system. In this article, we will open your eye to the Relative Strength Index (RSI) indicator and give some tips to better your use of it.
Relative Strength Index Architecture and Designer
The RSI indicator was developed by an American mechanical engineer named J. Welles Wilder.
The indicator is attached beneath your chart in a distinct parallel aperture. Even though, some newly developed charting interfaces come with more options. The Relative Strength Index technical indicator is comprised of a line, which moves between 0-100 range.
The range is marked based on three basic levels:
- 0-30: Oversold Area
- 30-70: Neutral Area
- 70-100: Overbought Area
Mobility from below the interline (50) to the top signifies an uptrend. An up-moving centerline cross occurs when the RSI value crosses the 50 lines upward on the scale, moving towards the 70 lines. This signifies the market trend is strengthening and is seen as an uptrend signal until the RSI moves to the 70 lines. The RSI line shifts in and out of these three zones creating different signals on the chart.
RSI Line Calculation
The optimized default RSI setting is the 14 period. Now let’s explain the RSI calculation a bit further:
First, let’s take a view at the RSI formula using the 14-period setting:
RSI = 100 – (100 / (1 + RS)
Please note that RSI stands for Relative Strength Index in the formula above.
RSI Trade Entry signals
To enter an RSI trade, you need to see an indication from the RSI indicator. This could be when the RSI line is in the overbought or oversold area, or an RSI divergence setup. If you are inputting your signals based on an overbought or oversold signal, then you would long or short the instrument when the price action reaches the defined zone for entry on the RSI indicator window.
How to Trade Using RSI
RSI is similar to the Stochastic indicators and can be used in a like manner. We can use it to pick potential head and bottoms depending on the market environment
How to determine the trend using RSI
RSI is a technical tool populate among traders because it can also be used to confirm trend evolutions.
If you think a trend is forming, take a quick look at the RSI and look at whether it is above or below 50.
If you are looking at an uptrend, then make sure the RSI is above 50.
If you are looking at a downtrend market, then make sure the RSI is below 50.
Relative Strength Index (RSI) Indicator for Day Trading:
The RSI measures the quota of up to down-moves and establishes the calculation so that the index is shown in a range of 0-100. If the RSI is 70 or more, the currency pair is said to be overbought (a market condition whereby prices have risen more than the market forecast).
An RSI of 30 or below is regarded as a signal that the currency pair may be oversold (a situation in which prices have fallen more than the market forecast). With this speculative data, we can use the RSI indicator to day trade for our benefit. Contrary to popular opinion, the RSI is a leading indicator.
Best RSI Indicator Setting for Day Trading
For a significant number of traders, using the RSI indicator for day trading is useful. The optimized RSI setting of 14 periods is suitable for most traders, especially for swing traders.
We have some intraday traders who use different settings when utilizing the RSI indicator for day trading. They prefer not to use the 14 sets because it might generate premature trading signals. As a result, some traders choose to lessen their time frame, while others prefer setting the RSI period a bit lower to increase the sensitivity of the oscillator. Some traders deal with this problem by lowering their time frame. Others lower the RSI period setting to get a more sensitive oscillator.
- Short-term intraday traders (day trading) often use lower settings with periods in the range of 9-11.
- Medium-term swing traders frequently use the default period setting of 14.
- Longer-term position traders often set it at a higher period, in the range of 20-30.
- Which settings to choose when using the RSI indicator for day trading depends on your strategy.
Which indicator works best with RSI?
Along with strategy and settings, we can combine other technical indicators to complement the RSI when using the RSI indicator for day trading. Some of the best ones are momentum indicators. We recommend using the moving average convergence divergence (MACD) and moving average crossovers.
The RSI can maintain overbought readings for quite some time, while the MACD can show divergence by turning down as the price advances, further indicating that the market is overextended and may retrace.
Exponential Moving Averages can help confirm RSI indications. For example, the EMA 5 crossing over the EMA 10 compliments the RSI indicator very effectively.
It is so easy to jump and start using the Forex RSI indicator for day trading, novice traders often begin without testing different parameters, or educating themselves on the proper interpretation of an indicator, because of the desire to grab money quickly! As a result, the RSI has become one of the most widely misused MT4 indicators.
Once understood and correctly applied, using the RSI indicator for day trading will help you develop the ability to indicate whether prices are trending when a market is overbought or oversold, and the best price to enter or exit a trade.
It can also indicate which trading is most active, and it provides information for determining key price levels of support and resistance. The RSI can provide you with technical trend information, as well as RSI buy and sell signals.
You must practice RSI trading strategies on a demo account first before applying them to a live account. Additionally, the RSI strategies can complement any Forex trading strategy that you may have already been using.