rsi and forex
The Relative Strength Index (RSI) is commonly used to indicate temporarily overbought or oversold conditions in the market. An intraday forex trading strategy can be devised to take advantage of the RSI signals that a market is overbought and therefore likely to retreat.
The RSI is a widely used technical indicator and an oscillator that indicates that the market is overbought when the RSI value is over 70 and indicates oversold conditions when the RSI reading is less than 30. Some traders and analysts prefer to use the more extreme readings of the 80 and 20. . One weakness of the RSI is that it can repeatedly move up or down due to sudden, sharp price movements, and thus, it is prone to giving false signals. However, if those spikes or falls show a trade confirmation compared to other signals, it may indicate an entry or exit point.
It is not unusual for the price to continue to move above the point where the RSI first indicates the market as overbought or oversold. For this reason, a trading strategy using the RSI works best when complemented with other technical indicators to avoid entering a trade too early.
- Common levels to pay attention to when trading with the RSI are 70 and 30.
- An RSI above 70 is considered overbought. When it is below 30 it is considered oversold.
- Trading based on the RSI indicator is often the starting point when considering a trade, and many traders place alerts at the 70 and 30 points.
- When the alert is triggered, the trader will check the validity of the trade.
- The RSI can give false signals, and in volatile markets it is not uncommon for the RSI to be above 70 or below the 30 mark for extended periods of time.
Identifying Trading Setups Using RSI
Here are some steps to implement an intraday forex trading strategy that employs RSI and at least one additional confirmation indicator:
- Monitor the RSI for readings indicating whether the market is overbought or oversold.
- Consult other momentum or trend indicators to confirm signs of an impending retracement. For example, if the RSI shows an oversold reading, an upward retracement is expected, although not necessarily confirmed.
It is considered good practice to start trading looking to profit from retracements if one of these additional conditions is met:
- Moving Average Convergence Divergence (MACD) has shown divergence from price (for example, if price has made a new low, but MACD has not moved from downslope to upslope).
- The Average Directional Index (ADX) has turned in the direction of a potential retracement.
If the above conditions are met, consider initiating a trade with a stop-loss order beyond the most recent low or high price, depending on whether the trade is a buy trade or a sell trade respectively . The initial profit target can be the nearest identified support/resistance level.