How to Trade Using RSI Indicator

 How to Trade Using RSI Indicator

Many trading platforms have over 100 momentum indicators. RSI is among the best-approved indicators. It was developed by J. Welles Wilder in 978.

Relative Index Indicator (RSI) is a momentum indicator used to analyze the extent of the current price changes to assess the oversold/overbought conditions in the market. RSI is a ratio that is expressed in a range of between 0-100.

The major disadvantage of the RSI indicator is that it can give inaccurate signals. It can give an incorrect impression of the market due to unexpected and rapid price changes. To provide accurate signals, RSI should be used along with other technical indicators.

Many trading platforms can automatically calculate the RSI

To calculate RSI, you use the formula below:

RSI=100- (100/

(1+A/B)

Where:

A is the mean of the price increase change

B is the mean of the price decrease change

RSI Setting

The default RSI value is 14 periods. This means that the indicator analyses the closing price of 14 candles at a given period. The setting of the indicator can be adjusted as follows:

·    Intraday trader: lower setting to 9-14

·    Swing traders: you can use the standard-setting.

·    Long term traders: use a higher period of between 20-30

 

 

RSI Oscillator Signals

Sometimes, the prices of the instruments continue to rise or fall beyond the point where the RSI shows the market is overbought or oversold.

RSI provides three signals as follows:

1.   RSI can indicate an overbought condition if it falls between 70-100

2.   RSI can indicate an oversold condition if the value ranges between 30-0

3.   RSI Divergence signal which shows a contrasting overall price. Such signals provide a hint in potential reversal markets.

During the times of increased market volatility, the overbought and oversold levels are set at 80 and 20, respectively

Using RSI to establish the Trend

RSI is used to confirm market trends. An uptrend is formed while the RSI is above 50. A downtrend is formed by an RSI of below 50.

RSI Trade Entry

To start a trade look out for the three RSI signals (overbought, oversold, or RSI Divergence signal) and the price action signal.

In overbought/ oversold signals, you buy or sell the currency when the price goes beyond the specific threshold on the RSI indicator. In RSI Divergence, you enter trade if RSI direction following the price action nears 2-3 candles in a row in your intended direction of trade.

RSI Stop Loss

RSI indicator is not always accurate if used only by itself. To prevent losses in such scenarios, stop loss is important. Using stop-loss helps you to leave a trade if the price goes beyond your specified levels. Stop-loss can be initiated either before or during the trade.

RSI Profit Take

The general rule in RSI is that you should keep your trade until you receive a reverse signal from the RSI indicator. However, based on the price action rule, you may collect partial/full profits of stop-loss before you get the reverse signal.

 

Conclusion

RSI is one of the momentum indicators. The indicator has three zones; oversold zone (30-0), overbought zone (70- 100), and the neutral zone (30-70). Experts consider it as a valuable source of trading signals.

The success of using RSI depends on additional indicators used along with it.