The RSI is a popular oscillator developed by Welles Wilder in 1978. This indicator measures the strength of the market trend (the ratio of bullish and bearish candles in a specified period of time). RSI values range from 0 to 100. A value near 100 indicates that the bull market is strong while values close to 0 indicate that the bearish market trend is strong. While the RSI approaching extreme values, indicator becomes less sensitive to changes in price, making the indicator is returned to neutral territory.
Use of RSI Indicator Technical Analysis
RSI as an oscillator
Values above 80 are considered overbought territory and values below 20 are considered oversold territory. While the market reaches higher values, there is a possibility that all buyers interested in the currency have already taken a position (this causes RSI readings go above 80). At this time some buyers begin to take partial profits and other close their positions. This gives opportunity to the market to make a kick making the neutral territory RSI breaking back to level 80 down. The same applies downward movements when reading the RSI reaches values of oversold (below 20) vendors begin to take partial profits and other close their positions, this gives strength to RSI crossing the value 20 upwards to neutral territory.
Remember that overbought and oversold signals are generated when the indicator returns to neutral territory of an overbought condition or oversold. Such signals tend to work better when the market is in ranges.
RSI divergences trading
Like other indicators, the RSI is also used to make differences based operations. When the price reaches new highs and the indicator fails to do so or when the indicator reaches new highs and prices fail to do so, there is a divergence.
In this graph we see clearly that the market reaches lower floors, and the indicator fails to reach them, and instead makes higher floors. This indicates that downward force is not as strong as at some point it was.Like the other signals, when the indicator signals a divergence the market can change direction, entering a period of consolidation or have a small correction.
RSI as a Trend indicator
When RSI values are above 50 indicates that average gains is greater than the average market losses (uptrend).
Readings below 50 indicate that the average losses are larger than average earnings (downtrend).
Here the rule would be. When the RSI is above 50, the market is considered in an uptrend, and when the RSI is below 50, it is considered a downtrend is important to mention that when we use the RSI to measure trend, it is advisable to use more periods, such as RSI (40) or RSI (50).
Please note that: Successful Technical Analysis largely depends on the functionalities of the MT4 Platform provided by your broker. If you are new in forex trading, you might consider reading the article on what is the best trading platform, Introduction to MT4 Platform and MT4 Platform functions. We have used a fully functional MT4 platform provided by HYCM Broker. Read why their MT4 platform has better trading conditions from the HYCM Broker review.
Technical Analysis in Forex Trading
|Lesson 1||Types of Technical Analysis Indicators|
|Lesson 2||Forex Trading Trendline Analysis|
|Lesson 3||Forex trading Chart Patterns|
|Lesson 3.2||Double Tops and Double Bottoms|
|Lesson 3.3||Head and Shoulders Pattern|
|Lesson 3.4||Rectangle Chart Patterns|
|Lesson 3.5||Triangle Chart Patterns|
|Lesson 4||Japanese candlestick Trading Strategy|
|Lesson 4.2||Japanese candlestick Trading Strategy Part 2|
|Lesson 5||Support and Resistance Levels|
|Lesson 6||Types of Technical Analysis Indicators|
|Lesson 6.2||moving averages Technical Analysis|
|Lesson 6.3||MACD Indicator Technical Analysis|
|Lesson 6.4||RSI Indicator Technical Analysis|
|Lesson 6.5||Stochastics Indicator Technical Analysis|
|Lesson 6.6||Technical Analysis with Bollinger bands Indicator|
|Lesson 7||Fibonacci Retracement Forex Strategy|
|Lesson 8||Forex Trading Pivot Strategies|