How To Use The Relative Strength Index (RSI Indicator)
The All-Star RSI indicator is probably one of the indicators you heard about on your quest for more knowledge about Forex Trading and trading in general. Prepare for shock and awe. The RSI indicator is the fraternal twin sister of the stochastic indicator which means, most people have also been using this indicator the wrong way!
Paint a Picture
In the above example is the RSI indicator. On the right are its units of measurement which go from 0-100. Above 70, price is considered to be Over-Bought and Below 30, price is considered to be Over-Sold. It is a MOMENTUM indicator that attempts to calculate the strength in a given trend. We can not (should not, rather) pick tops and bottoms solely using the RSI indicator. The Over-Bought signal should tell you that the strength of a particular trend is approaching its peak so a reversal may come SOON, NOT NOW. Let’s look at an example.
In example 1B, the blue highlighted zones “A” and “B” are places where price had entered an Over-Bought area and exited (Which is how most people determine an entry point for a sell position) and mere hours later those highs were broken. My friends… This is not how you want to be trading. You might win 1, 2 even 3 trades, but the end result won’t be positive. At this point, you might think I’m completely against the RSI indicator and just set on dogging it. Well, there is a way to use this indicator that I don’t completely disagree with…
How YOU can use the RSI indicator
The RSI is a less sensitive version of the stochastic so what traders usually do is add a 50 line on the indicator. Low key a “Zero-line” and above the 50 is considered to be bullish while below 50 is considered to be bearish. Let’s see what that looks like…
In Example 2, The green line at the 50 line now helps us look for Bullish and Bearish opportunities on a lower timeframe. The blue zone highlighted a period when you would look to hunt bullish opportunities and vice versa. This approach will help you be more right than wrong since you would be using the RSI to help you identify trend direction instead of picking tops and bottoms.
Don’t bet the farm.
Don’t lose your shirt.
Cut the L.
Keep the W.