How To Trade The Forex Market Using Relative Strenght Index

 

Relative Strength Index (RSI) shares similarities with other oscillators because it is designed to identify overbought and oversold conditions in the market. It is also scaled from 0 to 100. Typically, readings below 30 indicate oversold, while readings over 70 indicate overbought. 

How to Trade Using RSI

The RSI can be used just like other oscillators. Its primary purpose is to pick the potential tops and bottoms price movement. This is determined by using its overbought and oversold readings

We take a look at the chart below to see RSI in action.

Going through the chart above, you can see price trading up in the red rectangle. While price was moving in that direction, RSI moved above the 70 line signaling an overbought which also means we are running out of buyers in that uptrend move. Eventually, you can see that price fell at the oversold reading of RSI.

The reverse scenario took place at the rectangle marked blue. RSI gave an oversold reading as it touched the 30 level. Shortly after, the market ran out of sellers and price made a move for the upside. This is an indicator that when RSI is on the extreme, we should be getting set for a possible reversal move.

 

Determining the Trend using RSI

RSI is a very popular tool because it can also be used to confirm trend formations. RSI is one of the most widely used trading indicators by professional traders just like stochastic and MACD.

One of its beauty is the fact that it can be used to determine if a trend is forming in the market. As traders, we want to always be on the side of the trend and join the move.

Aside the overbought and oversold levels of 70 and 30, a reading of 50 crossing to the upside or to the downside can be of great use to gauge the start of a trend. The 50 line is not highlighted on the indicator software by default; you have to manually put it there by yourself.

If you are looking at a possible uptrend, then make sure the RSI is above 50. If you are looking at a possible downtrend, then make sure the RSI is below 50.

You can see as the crossing of RSI on the 50 confirmed a trend. This also applies if we looking for a downtrend.

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