One of the most popular forex oscillator. Similar to [CCI and Stochastic]. RSI compares recent price rallies and its declines, to be able to calculate overbought and oversold zones, of most likely price retracement.
This excellent tool of technical analysis was developed by famous W. Wilder. RSI is an oscillator that is able to provide reading about market being overbought [over 70] or oversold [under 30]. RSI indicator does not provide exact signal for position entry or exit, however there is a few rules that make this indicator useful in forex.
Zones of RSI forex indicator.
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Over 70 line - indicates overbought conditions.
Under 30 line = indicates oversold conditions.
Crossing above either of those lines does not indicate conditions suitable for immediate position entry. Considering that RSI can remain in overbought/oversold conditions for a long time. Experienced forex traders often use RSI zones to find a trend beginning.
If we wish to use indicator to sell at overbought [over70] and buy at oversold [under 30], we should always wait for it to return from overbought/oversold zone back to central range.
Often neglected 50 line [middle line] separated uptrend from downtrend and can be effectively used as trend confirmation tool. We can improve trend reading sensitivity (filtering capacity) by plotting additional lines on RSI chart. For example we can consider adding 55 and 45 lines to separate uptrend from downtrend, with zone in the middle to be considered as consolidation zone.
How to use RSI forex indicator
RSI indicator can be used to find and time position entry. After we identify trend, we can use RSI to find good entry price. Within uptrend, we will be looking for overbought conditions in RSI and within downtrend for oversold conditions. For this purpose RSI with quicker period is more suitable.
RSI 21 used to identify uptrend, than ultra fast RSI 2 is used for position entry.
We can also use RSI to determine the trend.
By setting RSI on period over 14, oscillator can be used to confirm trend. We can easily manipulate its sensitivity for trending conditions by adjusting calculation period and plotting additional line on indicator chart.