A forex RSI strategy is a set of analysis used to determine whether to buy or sell a currency pair at a particular time based on the information of an RSI indicator. So, RSI strategy is some sort of indicator whose job is basically to point out when it is best for a trader to either enter or exit a trade. Other indicators that can guide one when carrying out a forex transaction include
- Moving average
- Moving average convergence and divergence, MACD
All these tools, together with the RSI, are known as the four best indicators in the forex market, with the purpose of aiding traders make prominent decisions in the ways of
- Trend confirmation
- Trend discovery and follow up
- Profit taking
However, this article will be based on the RSI strategies.
WHAT IS FOREX RSI?
RSI stands for Relative Strength Index. It is a momentum indicator designed to compare the magnitude of recent gains and losses in trades over a specified time range to measure speed and change the price range of a currency pair. It has been said that there is nothing new under the sun. This applies a whole lot to forex trading; specifically to the RSI strategy where one have to go back in time, study how trades resulted to either losses or profits, and develop a strategy from it. SO long as the market conditions are the same, such strategies tend to work well.
The forex RSI indicator is often used together with trend lines since they often coincide with support and resistance levels in reading RSI charts. Its application can be refined by looking out for divergence between the RSI indicator and price.
TRADING THE FOREX MARKET WITH RSI INDICATOR
The RSI strategies are simple; they use past price movement to try to determine what the future ones will be. They can be used in a number of different ways, some of which are
1. THINK BEYOND THE CROSSOVERS:
Most times, traders move towards overbought and oversold values with the RSI indicator, which can be counterproductive in strong trending market environment. As a momentum oscillator, the RSI can keep extended trend RSI overbought or oversold for a long time. This is not to say that the overbought and oversold values are not intuitive; but traders should consider beyond the crossovers when using forex RSI strategies.
2. KEEP AN EYE ON THE CENTER LINE:
Traders should beware not to forget the center line when using this strategy because the RSI is not no different from the center line. It can be helpful in a lot of ways
- In showing shifts in trends
- Indicates upward momentum when the RSI is above 50, an opportunity to buy into the market
- A drop of the center line below 50 indicates the development of a new bearish market trend
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.