RSI is well known and commonly used oscillating forex indicator. It can be used in several different ways to identify trend and /or corrections within the trend. RSI is one of those indicators, that can be easily worked in, optimized and tested in automatic trading system. Let's look at different ways how to use this amazing tool in our forex trading.
How to use RSI forex indicator
Trend identification with RSI
RSI with higher calculation period can be used to separate uptrend from downtrend.We identify trend by simply applying 50 line, between standardly used 70 and 30 lines. Sensitivity of trend identification can be adjusted by manipulating RSI calculation period, and modifying trigger sensitivity, either by moving overbought oversold zones closer or further apart. It is also possible to separate range from the trend by creating no trade zone instead of simple 50 line. For example zone between 45 and 55 can be considered no trade zone, with uptrend above 55 and downtrend below 45 line.
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Standard overbought oversold indicator.
RSI can be also used as it was intended. To identify overbought (above 70 zone) and oversold (below 30 zone). Indicator moving to either one of those extremes signalizes imminent price reversal.
Sell: RSI moves above 70. We sell once RSI returns back under it.
Buy: RSI moves below 30. We buy once RSI returns back above it.
Signal sensitivity can be manipulated by placing overbought , oversold lines closer or further apart. By placing overbought line at 80, signals will become less frequent, but more accurate. Same applies for moving oversold zone from 30 to 20 line.
Trigger sensitivity can be manipulated according to our trading needs and market conditions. However, this approach works only in ranging conditions. Longer lasting trend can have catastrophic effects on this signal. Therefore, it requires filtering, either by using RSI or other trend indicator to filter out the signal.
RSI as momentum indicator
Price suddenly moving above overbought line or below oversold line, often times signalize sudden beginning of new substantial price move. Wide candle, together with RSI moving into extremes can signalize that entering in the direction of price explosion might be a good idea. Breakout may be present in the market, leading to massive price movement. In these conditions, RSI can remain in overbought, oversold conditions for a long time.
RSI can be used in many ways that may seem contradicting. This only proves that RSI is a versatile tool that can be used to visualize almost any market situation.