Digging into the quintessential overbought oversold indicator! Oscillator indicators in general, are risky and unreliable beasts. They might look friendly and approachable at first, only to BITE your hand off just when you are most comfortable! The RSI indicator is usually the go to oscillator for the novice trader when deciding to enter that first trade.
It is almost impossible to resist the siren call of a trading signal from our favorite indicator. But approaching trading in a passive fashion like this is dangerous and will lead to the destruction of your account eventually!
In this article I will teach you how to avoid some of the major pitfalls that beset most beginner traders when it comes to the RSI indicator. These are the nitty gritty details on how the RSI indicator is built. In reality your charting software will do this calculation for you, thats what technology is for!
Pick the base number of periods on which to base the study. RSI definition, what does it all mean for my trading? The RSI indicator Has definitely got one up over its competing oscillator in the fact that it has fixed points extremes at 0 and Rather than the relative floating extremes of say the Momentum or Rate of change oscillators. In that sense it does give the trader a base to work from in judging one period of market action to another.
If the indicator is below 30, then the price action is considered weak and possibly oversold. If it is reading above 70, then the asset is after a strong uptrend and could be overbought. Because the RSI is used as a tool to indicate extremes in price action, then the temptation is to use it to place contrarian trades,.
Buying when the indicator crosses 30 to the upside means you are counting on the trend reversing and then profiting from it. The same is true for selling when the RSI crosses down below 70 and using this a sign that the market is reversing from a strong uptrend. Life is never that simple though, and more often than not, you will find that the risk involved in this type of simplistic approach is ruinous to you account balance. New traders tend to gravitate to the RSI when attempting to delve into analysis for the first time.
It is easy to aproach and easy to understand, it has fixed overbought and oversold levels and it tends to be correct over longer periods,. However, you cannott ignore the hugh failings of the RSI indicator in a strong trend! It can stay at 90 for days on end,.
This is no good to the novice trader who pressed the sell button without placing a stop! The RSI can remain at extreme levels for long periods in a strong trend.
Dont jump right in when you see a reading of 90, first allow the RSI line to fall back below the overbought line to at least give a stoploss level to trade off. If the RSI line reaches an extreme and then returns to the centreline it is a better indication of a turning point in the trend. Waiting for this to occur can cut out those nasty impulsive trades! It is common for technical traders to watch the centreline to show shifts in trend,.
If the RSI is above 50, then it is considered a bullish uptrend, and if its below 50, then a bearish downtrend is in play. The trader uses this signal as an opportunity to sell the market. The trader uses this signal as an opportunity to buy the market. How to use rsi indicator in forex trading. In order to get real value from the RSI indicator and take advantage of its benefits,. You need to approach it cautiously and interpret it a little deeper.
Here are a few techniques that you can use to cut out a lot of false signals. The problem faced by every trader who uses the RSI indicator is that the market may well continue in its trend despite the fact that it hit an extreme reading,.
It might even go on to leave that price level behind in the distance depending on the strength of the trend. For this reason there came about the concept of the failure swing, in order to interpret the index better. In this case, a short position will be entered only after the RSI cuts down through the 70 line from the top. The trader uses this rise above the 30 line as a trigger to go long. Positive divergence happens when the price of an asset is drifting lower yet the RSI is starting to trend higher.
This could mean that the price is nearing a bottom and will probably turn up soon. Negative divergence happens the opposite way, the price is driving higher, but the RSI has stalled and is beginning to turn lower. When this occurs it is likely that the price will stop rising soon after.
And then follow the RSI lower. In a strong upward trending environment, the RSI rarely falls below 40, and will most always stick to the 50 — 80 range. In this case the range will below the centreline and spike into the lower end of the indicator.
I generally look for the RSI to register several extreme readings in a row before placing any great weight on the signals. When the RSI crosses the centreline it is a stronger signal that a trend change has happened than a simple extreme reading above or below the lines.
When the indicator crosses the centreline to the upside, it means that the average gains are exceeding the average losses over the period. When a centreline cross happens, it can be a good time to think about trade entry on a fresh pullback in price. Draw a line connecting the dips in the RSI line, if the RSI breaks this trendline to the downside it is an early indicator of an impending change.
A break of the RSI trendline often precedes a break of the price trendline on a price chart. Relative strength index trading strategies. A compound strategy is when you use two indicators together. It is always advised to balance the signal of one indicator against another, this will help to cut out alot of false signals. There are a few indicators that pair well with the RSI and using them together can proved better trading signals. All of the above trading strategies should always be used with a risk management strategy alongside.
We combine the RSI indicator along with an engulfing candle stick. Only enter the market whenever the RSI gives an overbought or oversold signal which is supported by the a bullish or bearish engulfing candle. Close the position on a solid break of the opposite RSI line.
The RSI indicator hit the 30 line to indicate an oversold condition The trader uses this signal as an opportunity to buy the market. And then close the position if either indicator provides an exit signal. We place a trade when the RSI gives an overbought or oversold signal which is supported by a crossover of the moving averages. Although this trading system came close, it did not generate any signals over the 16 month time period! We combine the RSI indicator along with a Bollinger band squeeze.
First we wait for a Bollinger band squeeze to occur on a daily chart, the squeeze should come to within points or so. Only enter the market whenever the RSI gives an overbought or oversold failure swing. A bullish signal happens when the rsi falls below 30 and then rises above 30 again. Again this trading system did not give any signal over the time period. We can count out this system also! It did not give many trading signals but, when it did, They were fantastic signals.
Learn how an Elliott Wave Forex trader applies the theory to trading successfully and profitably. I base all trading decisions on Elliott wave analysis, technical analysis, momentum indicators and sentiment readings.
You must be logged in to post a comment. July 19, Posted by: The RSI indicator is a cruel mistress! The fact is; Oscillator indicators in general, are risky and unreliable beasts. Come on, admit it, we have all done it! We take a quick glance at the RSI indicator in search of that sweet confirmation bias when we are just itching to make a trade. I am going to show you a few important things: I am going to break down the RSI indicator so you understand it from head to toe.
I will explain the top 5 RSI trading strategies that we hear so much about, what they mean and how to trade using them. In general the RSI is interpreted as follows; If the indicator is below 30, then the price action is considered weak and possibly oversold.
Because the RSI is used as a tool to indicate extremes in price action, then the temptation is to use it to place contrarian trades, Buying when the indicator crosses 30 to the upside means you are counting on the trend reversing and then profiting from it. It is easy to aproach and easy to understand, it has fixed overbought and oversold levels and it tends to be correct over longer periods, So; I can see why it is so attractive to all of us, However, you cannott ignore the hugh failings of the RSI indicator in a strong trend!
It can stay at 90 for days on end, dancing above the overbought line like it is on speed at a london rave in ! Some of us like myself can only learn the hard way! Here are some quick lessons: Wait for conformation before considering a trade, The RSI can remain at extreme levels for long periods in a strong trend SO; Dont jump right in when you see a reading of 90, first allow the RSI line to fall back below the overbought line to at least give a stoploss level to trade off.
Watch the Centreline for trend confirmtion. It is common for technical traders to watch the centreline to show shifts in trend, If the RSI is above 50, then it is considered a bullish uptrend, and if its below 50, then a bearish downtrend is in play.
Simple RSI strategy back test: Lets see how that worked out for him! In total the trader made point gain in their trading account over 8 trades. This was done with 2 winning trades and 6 loosing trades.
In order to get real value from the RSI indicator and take advantage of its benefits, You need to approach it cautiously and interpret it a little deeper.More...