How do you trading strategy using RSI?
Before exploring further about how to use the RSI as a basis for strategy, it’s good to know in advance what the RSI is.
RSI abbreviation from the Relative Strength Index.
This is a technical indicator that measures the magnitude of price changes in a certain period to analyze whether conditions in the market have reached oversold or overbought.
Use the RSI Indicator mainly to identify oversold and overbought levels of investment assets.
Not only for this function but also as a marker for trade opportunities that arise.
The RSI is a leading technical indicator of Oscillator type (preceding price movements).
This indicator first introduced by J. Welles Wilder Jr. In 1978 in his book entitled ‘New Concepts in Technical Trading Systems’.
This indicator is a Momentum Oscillator that measures the speed and changes in the prices of the financial market.
The RSI moves between the range of 0 to 100 and according to Wilder’s theory, the standard period is 14.
You are free to use the RSI indicator to trade with TenkoFX, you are free to try all kinds of RSI settings so that you find the best settings that provide the best signal accuracy, you can change the time period and overbought and oversold values so as to give signals with high accuracy.
RSI can used for all type account even STP,ECN or Crypto, open account with TenkoFX
RSI Indicator Settings
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On forex trading platforms Metatrader, the RSI indicator appears in the form of a fluctuating line below the price chart.
We do not need to calculate and draw manually, because the RSI indicator can be raised simply by clicking Insert –>> I
Indicators –>> Oscillators –>> Relative Strength Index.
The default setting period is 14 trading days. The following are examples of RSI indicators that are installed based on these settings.
The value of the RSI indicator will always fluctuate between 0 to 100.
Generally, traders read the RSI indicator with guidelines below:
- The RSI value above 70, means an asset has been overbought, on this condition considered as sell signal entry.
- The RSI value under 30 or lower, meaning an asset has been oversold, on this condition is signal for a buy entry.
However, price movements are not absolutely in accordance with these guidelines.
False signals may often appear. So will better, the use of the RSI indicator should be accompanied by other technical indicators to confirm the signals that appear.
Alternatively, traders can apply different strategies in reading RSI indicators.
How to use RSI?
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RSI is not as aggressive as stochastic.
RSI is an indicator that rarely raises buy or sell signals.
Therefore the RSI may not be suitable for aggressive traders, ie traders who want to make as many and as many transactions as possible.
However, because RSI rarely raises a signal, usually the appearance of the signal is followed by a fairly long movement.
That is why RSI is suitable for traders who tend to be calm, who are very patient waiting for RSI signals to make transactions.
There are a few tips you can use in using RSI to anticipate the emergence of false signals.
Rules for buy
- RSI must be in the oversold area (below 30)
- Wait until the RSI out from the oversold area (up to above 30)
- Make sure there is a bullish candlestick when the RSI is out from the oversold area.
- Wait until the candlestick is closed.
- Entry (buy) at the next candlestick opening.
- Place a stop-loss slightly below the last swing low.
Don’t put the stop loss exactly at the last swing low. As anticipation, keep it slightly below the swing low.
With experience and the number of practice, you will be more familiar with the characteristics of the market so that you can estimate where you should place a stop loss.
Rules for sell entry
- RSI must be in the overbought area (above 70)
- Wait until the RSI is out from the overbought area (dropping below 70).
- Make sure there is a bearish candlestick when the RSI is out from the overbought area.
- Wait until the candlestick is closed.
- Entry (sell) at the next candlestick opening.
- Put the stop-loss slightly above the last swing high.
How to trade using a more accurate RSI
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On theory, the RSI indicator always fluctuates between levels 0 and 100 along with changes in the price of the currency pair.
Therefore, traders generally set threshold levels 30 and 70 as a barrier between oversold and overbought conditions.
If the indicator falls below 30, it means oversold, and the price will reverse, vice versa If the indicator breaks the 70 levels, it means overbought, and the price will reverse.
However, in practice, traders will often find such condition
The indicator does not come out from below level 30 or vice versa, it doesn’t drop from level 70, even though it’s been days.
This is a “trending” market situation.
If you are not ready to deal with it, then you can get a stuck floating loss for a long time and end up being hit by a Margin Call.
The indicator does not go above level 70 nor fall below level 30, even though it has been for days too.
This is usually associated with a “sideways” market situation and low volatility.
If you are not ready to face it, then you will not be able to open trading positions because there is no signal.
To avoid being trapped by the myth of the inaccuracy of the RSI indicator due to the two cases above, you can try applying the following steps:
RSI Indicator Settings Using Extreme Values
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In an effort to avoid false signals from the RSI indicator, traders can try to use extreme values as a basis for assessing overbought and oversold conditions.
For example, using values above 80 as overbought references, and values below 20 as oversold references.
Click on RSI properties, then type new parameter level of RSI with new setting 20 and 80.
Slide the oversold and overbought RSI thresholds to levels 20 and 80.
On the Metatrader platform, options like this will appear to customize the RSI indicator.
Choose 20 and 80 so that the level is marked automatically by the platform.
But the disadvantage, with the RSI default (14), movements in the forex market quite rarely reach these extreme RSI levels.
So, traders will not often find trading opportunities that can be utilized based on the identification of overbought and oversold conditions.
For the solution, don’t use the default RSI period (14), but it is lower than that, for example, you can try to use the period of 7.
By comparing with two setting periods of 14 and 7, some traders consider the RSI setting (7) with a reference value of 20-80 is more accurate than the RSI setting (14) with a reference value of 30-70
However, actually, we as traders can explore for themselves the parameters of the RSI indicator that is most appropriate for our trading system.
Combination of RSI Indicator and Trend Line
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The RSI indicator is also often used together with the Trend Line.
A comparison between the two on one screen will indicate whether Support – Resistance along the Trend Line coincides with the position of the RSI, or instead signals that a breakout of the Trend Line has been formed.
The Trend Line on the price shows the meet of Resistance points aligned with the Trend Line drawn at the RSI.
When the downward trend is almost over, the RSI sticks out to break the Trend Line, which is also followed by a price reversal to be bullish.
Likewise, the Trend Line rises in green on the right side of the image.
The Trend Line at the price shows the meeting of Support points aligned with the Trend Line drawn at the RSI until finally a breakout of the support level.
Forex RSI divergence trading strategy
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Divergence is a condition or situation when the price movement moves in a different direction from the Oscillator type indicator.
For example, CCI and includes the RSI.
Divergence is a condition or situation when the price movement moves in a different direction from the Oscillator type indicator, for example, CCI and includes the RSI.
The price hit a new high or low, but the RSI does not print in the same ways and gives an inverse direction. In general, there are two types of divergence.
- Bullish Divergence, which is when prices make new low levels, but the RSI does not decline again.
- Bearish divergence, when prices print a new high level, but the RSI is not rising anymore.
RSI swing trading strategy
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The trading strategy with RSI can be for swing trading, traders can use a good swing trading strategy for beginners and it works at an H1 timeframe and over a period of time and applies to each currency pair.
For this strategy you need:
- SMA 5 & RSI (setting set to Period 5)
- SMA 5 is to identify trends, while RSI to confirm the signal.
- The price must cross 5 SMA from the bottom to up and close more than 10 pips.
- RSI must be above the 50 value line (you can add value 5o by RSI properties and click on a level then choose “add”, then type 50 to add this value)
- Buy or place a buy stop order 2-5 pips above the high candle.
- Put your stop loss around 5 or 10 pips below the low of the candlestick.
- Take profit at 1: 3 The ratio or exit at the previous swing is high.
Generally opposite with buy rules
- The price must cross 5 SMA from the top to down and the candlestick must close more than 10 pips.
- RSI must be below the value line 50.
- Sell or by using stop orders sell 2-5 pips above the height of the candle.
- Put a stop loss of around 5-10 pips above the high candlestick.
- Profit target is at 1: 3 ratio or at the previous low swing.
If in trending the market, you might be able to get 100 pips in just a few hours, but you might be out of luck if sideways, and the possibility of false signals appearing.
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RSI is the default indicator for MetaTrader 4, which is included in the oscillator indicator.
Using this indicator must still use risk management to anticipate any false signals that might appear, put your risk-reward ratio to manage your risk.
Some traders try to develop RSI Algo trading, but this requires complicated code which if without knowledge of codebase MQ4 it will be difficult to make it.
You can keep a trading journal with RSI and record the number of transactions in a day and make a percentage of winning trades and losing trades so that you have experience and do an evaluation if you still experience frequent losses.