RSI is one of the most common indicators used for trading Forex. Today we will review RSI and trading tips for trending markets.
Swing traders look at the Forex market and attempt to buy currency pairs low in order to sell them at a later higher price. While swing trading strategies are popular, they completely rely on market timing. In order to help pinpoint their entries, traders can turn to a technical indicator. Today we will review the basics of the RSI (Relative Strength Index) indicator and how they can be used in conjuncture with a trending market.
Learn Forex – RSI with Overbought & Oversold Levels
(Created using FXCM’s Marketscope 2.0 charts)
RSI is considered a classic oscillator similar to MACD, CCI or Stochastics. It is calculated by comparing an recent gains to recent losses that push the indicator up and down as it follows the momentum of an underlying asset. To help make RSI easy to read the indicator can be seen segmented into overbought and oversold values. As RSI travels between the levels of 0 and 100, traders will look for overbought and oversold conditions.
Any reading of RSI above 70 is considered overbought. Traders consider overbought to be a condition where the market has pushed up price to making a new relative high. Conversely any value under 30 is read as oversold and considered an area where price may be interpreted as undervalued. Now its time to look how these conditions can be useful to a Forex trend trader.
Learn Forex – EURGBP 4Hour Uptrend
(Created using FXCM’s Marketscope 2.0 charts)
Once you have a feeingl for how RSI interprets price, it can then be used to time entries in trending markets. In the example above, we can see a 4Hour chart of the EURGBP currency pair. In an uptrend, traders can wait for an oversold condition. A reading of RSI under 30 would signal a pullback against the primary trend, allowing traders to enter a new position on a pullback from the current high. Entries can be timed when momentum returns in the direction of the trend when RSI closes back above an oversold reading of 30.
—Written by Walker England, Trading Instructor
