Hello traders, You may have used the Relative Strength Index for thousands of times for your Forex and stock trading activities and it must have generated more successful trades for you. So what is there to learn about RSI ? This article focuses on some of the basic trading rules related with RSI. So check below whether you are using this valuable Forex and stock indicator correctly.
The Relative Strength Index is an indicator which measures the overbought and oversold conditions in the market. The indicator oscillates between zero and hundred. If the indicator value is below 30, then it traditionally shows the oversold conditions. And if the RSI value is above 70, then it traditionally means that the market is overbought.
Oversold means there are no selling opportunities available at current price unless new buyers or sellers enter the market. So in an oversold condition where the RSI value is below 30, we can assume that the price will go up.
The same thing happens in the overbought conditions. Overbought means there are no buying opportunities available at current price unless new buyers or sellers enter the market. So in an overbought condition where the RSI value is above 70, we can assume that the price will go down.
The above two situations do not happen always. If the price always goes up when the value is below 30, and if the price always goes down when the value is above 70, then trading will be very easy for you. But i’m afraid, it is not. So it is very important to identify the key elements hidden inside this powerful indicator.
Identifying the trend
The trend is one of the most important factors to consider when trading. There are two golden rules that I keep reminding you. Never sell in an uptrend and never sell in a downtrend. These laws change sometimes. But it is good to follow these rules in the beginning.
Let’s talk about the trend and RSI. The trend is decided by number 50. If the value stays above 50, it is an uptrend. If the value stays below 50, it is a downtrend. It is as simple as that.
So you will have to check the trend first. Then you can apply the 30 and 70 strategies in RSI.
Practical usage of RSI with traditional method.
Here, we discuss some examples with RSI
To use the 30-70 method, first you should select a ranging market. The price should be going up and down in a range. Look at the weekly chart of GBPJPY given below.
In the above chart, the weekly price is ranging. So we need to look at the daily chart for the opportunities of this 30-70 strategy. So let’s look at the daily chart of GBPJPY.
As you can see, there are many clear opportunities in the above chart. The RSI value reaches 70 or above at 1, 2 and 3. This signals you that the price is going to go down. But you have to wait until price starts to show clear signals that it is going down. Sometimes it takes many days for the price to ultimately go down (see number 2 in the graph). So you should use confirmation signals of trend reversal to confirm that. Then you can sell the currency.
When the Relative Strength Index reaches below 30, it is an oversold condition. So look at the above graph again. The numbers of 4,5,6 and 7 show that the currency pair is oversold. So the price should go up. The same thing applies here. You should wait until price really starts to go up. Then you can buy the currency pair and earn more pips.
Practice again again in a demo account until you become successful. Then you can become a professional in RSI. Good luck!
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