RSI Strategy – How to Use the RSI in Forex Trading

This gives us confidence of it making a rise from here. Bullish divergence needs at least two swing lows on RSI but can extend to multiple swing lows. Forex Economic Calendar A: Monitor the RSI for readings indicating the market is overbought or oversold. Only initiate a trade looking to profit from a retracement if one these additional conditions is met:

Relative Strength Index, or RSI, is a popular indicator developed by a technical analyst named J. Welles Wilder. RSI is similar to the stochastic in that it identifies overbought and oversold conditions in .

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If the market is ranging, this can be a desirable trait in an indicator, as traders can often look to initiate entries in a range with RSI. However, if the market is ranging, the results can be unfavorable as price continues moving in the trending direction, leaving traders that had opened trades in the opposite direction in a compromised position. The picture below will illustrate this situation further: As you can see in the above graphic, price was trending up very heavily when four different RSI sell triggers occurred all circled in red.

Despite the fact that these sell triggers took place, price continued trending higher. If traders had opened short positions with these triggers, they would be in the precarious position of managing a losing trade. Perhaps more troubling is the fact that some traders may not be using stops on their trading positions, and the trader looking to sell an over-bought market because RSI had moved below 70, may find significant trading losses as the strength that originally caused the indicator to read above 70 continues to carry prices higher.

When trading with RSI, risk management is of the upmost importance — as trends can develop from ranges, and prices can move against the trader for an extended period of time. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Take a free trading course with IG Academy. Our interactive online courses help you develop the skills of trading from the ground up.

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Conditions in the demo account cannot always reasonably reflect all of the market conditions that may affect pricing and execution in a live trading environment.

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Guess who came out on top? Because we are able to see the hidden truths and relationships with RSI that many retail traders are not able to. This is once again a brilliant example of how we can use hidden horizontal support and resistance lines on RSI to our advantage.

So now that you have let your mind adjust to the paradigm shift of accepting hidden RSI horizontal levels as support and resistance, let me take you one step further and try to accept that support and resistance can come in the form of diagonal lines.

Here is an example of an ascending support line on the RSI indicator. We can see that price has bounced off this ascending RSI support line multiples times in the past. Based on this, we should be able to see price bounce once more time upwards. The next picture will show you how price followed the bounce on RSI as expected. We can see that RSI has bounced and with it, price has also bounced as expected.

Most people would not be able to see the hidden relationship between RSI and price in this instance because it looks like it is bouncing off random levels. However, a trick is to see whether diagonal lines are able to pick these levels and most of the time they work out wonderfully. This is a brilliant example of using an ascending support line on RSI to determine where the next bounce is going to occur along with price. Sometimes when price is bouncing off a support level, we are unsure whether it is a real bounce or a fake bounce.

An example is below. We can see that RSI has made a bullish breakout of a descending resistance-turned-support line which goes in line with price making a bounce above the This gives us confidence of it making a rise from here. Larger bullish breakout on RSI signalling a bigger rise in price is expected. Along with that, we see another bullish exit on RSI that stretches further back. One of the other ways we can tell whether price is going to bounce or drop soon is by seeing if there is recent bullish or bearish divergence against RSI.

I would go as far as to say that the RSI divergence indicator is used more as an additional element of confirmation rather than a strong indicator by itself. Below is an example of how RSI divergence works well with the horizontal support levels.

This is a good indication of price making a bounce from here. Price has made a bounce as expected and reached our profit target perfectly. We can see that price has made a bounce perfectly from our buying level and reached our profit target perfectly, as predicted by price. This teaches us that the RSI divergence indicator can be used more as an additional element of confirmation instead of purely trading off the divergence.

Here are some best practices to combine the RSI divergence with to get the best results:. In conclusion, we have to open our minds when learning how to use RSI as a trading strategy. There are many ways that we can also use RSI for forex scalping strategy so be sure to combine these unique techniques with the wide range of strategies we have here. All other trademarks appearing on this Website are the property of their respective owners.

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The RSI is a widely used technical indicator and an oscillator that indicates a market is overbought when the RSI value is over 70 and indicates oversold conditions when RSI readings are under Some traders and analysts prefer to use the more extreme readings of 80 and In the next article on the RSI indicator, we will put all of this information together to illustrate a simple trading system using this RSI oscillator. More information about technical indicators. Next Article >> Metatrader RSI Settings >> Basic technical strategies based on crossovers explained. If you still prefer a more sensitive indicator, try the 2-period RSI. Day trading need not be an affair of rapid trades. By taking fewer trades, you have more time to analyze the larger picture. This is the merit of this RSI day trading strategy.