How To Trade Forex Using RSI Indicator?
RSI is the short for Relative Strength Index; it’s a famous indicator that every trader adds to his chart to get more information on the price activity. It’s basically a line that moves between 0 and 100 giving Forex traders insights on where the price is planning to move in the future.
First you need to create a new chart in your trading platform. This particular indicator is present in all Forex platforms. But my favorite trading platform is always MetaTrader 4.
Carefully watch the RSI movement between the 0 and 100 lines. RSI usually goes up when the price rise and goes down when the price lowers.
Compare the highs and the lows of the RSI to the highs and the lows of the price.
What we are looking for here is a divergence pattern. It happens when the price makes higher highs and the RSI makes lower highs. What this indicates is that there is a reversal about to happen. Combining that with candlestick patterns like outside bars it can be a very strong reversal signal.
Another way to use RSI is to wait for it to reach extreme levels that would be anything above 80 or below 20. Those are overbought and oversold areas and the price usually retrace at such levels.
RSI could also be used as an exit signal. So if you have an open position and you noticed RSI divergence or even of RSI is showing overbought or oversold signs then it might be a good time to exit your trade to avoid losing some of your profits. A good way to practice that is to close 50% of your positions and let the other half run, make sure to move your stop loss to a breaking even point at that stage.
No trading tool is 100% accurate, you can never trade based on RSI alone. Having a good knowledge of candlestick price action along with drawing some support and resistance lines on longer time frames will enhance your profitability in a great way.
Mohamed Rabea - ForexFaqs.Net