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Forex Trading

RSI Indicator: Buy and Sell Signals

By October 19, 2021July 17th, 2023No Comments

How to Use RSI Indicator

However, it will take time to adjust it to your trading strategy before it really works. You can use the TickTrader platform for free to test the indicator. When you are confident, you can open an FXOpen account to enter the live market. Moving average convergence divergence (MACD) and RSI are both popular technical indicators used by traders, How to Use RSI Indicator but they serve different purposes. Moving average convergence divergence is better suited for identifying trend changes and momentum shifts, while RSI is better for identifying overbought and oversold conditions. Relative Strength Index RSI is a popular momentum indicator used by traders to measure the strength of a security’s price action.

What is the best RSI trading strategy?

The best RSI settings for swing trading may vary depending on the trader's preferred time frame and trading strategy. Some commonly used RSI settings for swing trading, however, include using a period of 14 with overbought and oversold levels set at 70 and 30, respectively.

Therefore, traders often combine them with lagging technical analysis tools. Traders add two EMAs with different periods to the chart and wait for a cross to confirm the trend reversal signal the RSI provided. RSI and MACD (moving average convergence divergence) are oscillators. However, they measure momentum differently, which allows one to confirm the signals of another.

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The RSI works well when you combine it with other indicators. For instance, you can pair the indicator with other tools, such as the average directional index, MACD, and moving averages. When two indicators align, that’s a great way to identify trading opportunities. For instance, when the MACD line crosses below the zero line and RSI crosses below the overbought region, that’s a perfect trading opportunity.

I drew vertical lines on the price chart so you can see the 50 candle low that we identified. If you need to use horizontal lines on your chart to verify that the candle has closed the lowest of the last 50, you can do so. This is not necessary but may be helpful for you to do and see how strong the trend is.

How to trade using RSI and other indicators

Although it is frequently used as a filter in systems where the main indicator is a trend one, it might be possible to try trading using RSI signals only. Traders often use moving averages (MA) in conjunction with RSI to identify trends and potential entry or exit points. For example, when the price crosses above a moving average and RSI moves out of oversold territory (above 30), it may signal a potential long entry. Conversely, when the price crosses below the moving average and RSI moves into overbought territory (above 70), it could indicate a short entry point. The divergence between the way an asset’s price moves and the RSI oscillator may point to the possibility of a reversal in trends.

Some variations of the strategy involve waiting for the RSI line to cross back above 30 (to buy) and to cross below 70 (to sell). The backtesting VBA Macro will try every combination, such as Take Profit at 3%, Stop Loss at 12%, and Momentum (a standard to trigger the Buy or Sell actions) at 5, etc. For starters, swing trading is a methodology that seeks to capture “one move” (otherwise known as a swing) in the markets. And to achieve this, you’ll sell into a rally as the price moves higher.

RSI goes down:

However, it can also point to a general trend, a trend reversal, or corrective pullbacks in price. Conversely, if the downtrend cannot reach 30 or below and then rallies above 70, that downtrend has weakened and could be reversing to the upside. Remember, both trend lines and moving averages are helpful technical tools to include when using the RSI in this way. As with most trading strategies, this signal will be most reliable when it follows the long-term trend. In addition, bearish signals during downward trends are less likely to provoke false alarms.

As a momentum indicator, the relative strength index compares a security’s strength on days when prices go up to its strength on days when prices go down. Relating the result of this comparison to price action can give traders an idea of how a security may perform. The RSI, used in conjunction with other technical indicators, can help traders make better-informed trading decisions. The bulk of the calculation is determining the average gain, divided by the average loss. The RSI indicator is a momentum indicator used in technical analysis that measures the speed of an asset’s price changes. It provides traders with signals about bullish and bearish price momentum and is typically plotted under the security’s price graph.

A false positive, for example, would be a bullish crossover followed by a sudden decline in a stock. A false negative would be a situation where there is a bearish crossover, yet the stock suddenly accelerated upward. A bearish divergence occurs when the RSI creates an overbought reading followed by a lower high that appears with higher highs on the price. After the RSI is calculated, the RSI indicator can be plotted beneath an asset’s price chart, as shown below. The RSI will rise as the number and size of up days increase. Traders who are looking for investment opportunities should look for RSI values that hit 30 or fall below that level.

  • However, they measure different factors, so they sometimes give contradictory indications.
  • Traders typically interpret the RSI line moving below the overbought line or above the oversold line as a signal to buy or sell.
  • The RSI is the best indicator to complement or qualify the signals delivered by the RVI, especially in trending markets.
  • Moving average convergence divergence (MACD) and RSI are both popular technical indicators used by traders, but they serve different purposes.
  • What we can see from this is that the RSI value where bounces occur, in this market, happens to be at the 19.74% level.
  • However, modifying overbought or oversold RSI levels when the price of a security is in a long-term horizontal channel instead of a solid upward or downward trend is usually unnecessary.

Cardwell observed when securities change from uptrend to downtrend and vice versa, the RSI will undergo a “range shift.” Wilder posited[1] that when price moves up very rapidly, at some point it is considered overbought. Likewise, when price falls very rapidly, at some point it is considered oversold. In either case, Wilder deemed a reaction or reversal imminent. The RSI is most typically used on a 14-day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively.