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RSI Strategies in Forex Trading
There are very few Forex traders who do not use the Relative Strength Index (RSI). Developed by Welles Wilder, a renowned technical analysis, it measures the magnitude and speed of price movements. Forex and stock traders use it primarily to identify overbought and oversold conditions so that they can take the appropriate actions.
The default settings for RSI are 14-period time frame, and high level shown by a horizontal line at 70 and low level shown by a horizontal line at 30 on a scale that ranges from 0 to 100. You can change these settings to suit your trading style. When RSI is above the level 70 line, it is said to be an ‘overbought’ condition; and when it is below the level 30 line, it is said to be an ‘oversold’ condition.
Here are some simple RSI strategies for Forex trading.
Buy when the condition is ‘oversold’ and sell when it is ‘overbought’
When RSI is below the level 30 line (oversold), it means it is time to buy. However, ‘oversold’ doesn’t mean the end of downtrend and that the prices will start falling. In fact, prices can fall even further down. So wait until RSI rises above the level 30 line and make sure that it is headed upward before buying. This strategy works for all time frames.
When RSI is above the level 70 line (overbought), it means it is time to sell. However, ‘overbought’ doesn’t mean the end of uptrend and that the prices will start rising. In fact, prices can rise even further up. So wait until RSI falls below the level 70 line and make sure that it headed downward before selling. This strategy works for all time frames.
Buy when RSI rises towards 70 from 50 and sell when it falls towards 30
Add a horizontal line at level 50. You will notice that RSI moves along this line when there is no trend. As soon as an uptrend begins, you will see the RSI rising aggressively towards the level 70 line. This is when you should buy. But before buying, make sure that it is really headed upward.
When a downtrend begins, you will notice the RSI plunging towards the level 30 line. This is when you should sell. But before selling, make sure that it is really headed downward. It works in all time frames.
Buy when RSI makes a W at 30 and an M at 70
When RSI is hovering near the level 30 line, look for a double bottom. It looks like a W (but doesn’t have to be a perfect W). It means that the prices are ready to rise and you can buy. But before buying, make sure that RSI is really headed upward.
When RSI is hovering near the level 70 line, look for a double top. It looks like an M (but doesn’t have to be a perfect M). It means that the prices are ready to fall and you can sell. But before selling, make sure that RSI is really headed downward.
When candlesticks and RSI are not moving in tandem
When the market is trending, the candlesticks and RSI move in tandem, both making higher high and higher lows and vice versa. However, sometimes, the opposite happens.
While the candlesticks are making higher highs and higher lows in an uptrend, you will notice RSI making lower highs and lower lows. This means that the uptrend is about to end. Choose the right moment and take a short position (sell).
While the candlesticks are making lower highs and lower lows in a downtrend, you will notice RSI making higher highs and higher lows. This means that the downtrend is about to end. Choose the right moment and take a long position (position).
RSI can be powerful technical analysis tool in Forex trading if you use it properly. As with most technical indicators, it works better with longer time frames. One big drawback of using RSI is that it is often hard to predict when it will change direction. Therefore, you should use it in combination with other indicators, such as MACD.
If you need help in deciding when and what to buy and sell, please visit my blog How To Do Forex. I’ve been trading Forex for the last 7 years and I know a thing or two about how the market works.