In this article, Forex Trading will learn about the Relative Strength Index (RSI) – one of the Forex market analysis tools favored by many investors. We will explore what is RSI means in investing, along with other important information related to this index.
Learn what RSI is.
What is RSI? Benefits of using the RSI tool for traders.
What is the concept of RSI?
What is RSI? This is understood as the acronym for Relative Strength Index – Relative strength index. A technical analysis tool used to measure recent price movements. It aids in assessing overbought or oversold conditions of a Forex or other asset based on recent price movements.
RSI is a widely used technical analysis indicator, often represented in graph form. This graph usually includes a line passing through two extreme points, called the oscillator. The value of the Relative Strength Index can range from 0 to 100, providing information about the strength of the trend and the buying or selling status of an asset.
Learn about RSI divergence
What is RSI divergence? It occurs when the price of an asset moves in the opposite direction compared to the technical indicator. This is often a sign that the current price trend may be losing strength and is at risk of changing direction.
When the Relative Strength Index reaches oversold levels, a bullish divergence may occur. This is often noticed when trading strategies reach high levels. In particular, it decreases while the price continues to decline, creating a new low. This phenomenon is called positive divergence. That could be a warning of a strong price increase despite the downward price trend.
When the Relative Strength Index reaches overbought levels, a bearish divergence may occur. This usually happens when RSI peaks and falls while the price continues to rise, making a new high. This divergence can also be a sign of weakness in the bullish trend. It can warn of a future price correction.
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Meaning of RSI line in Forex
To make more effective trading decisions, investors often use indicator tools. This is to identify the price change trend of a forex or asset. Among these tools, the Relative Strength Index is popular with many investors.
What is RSI? It helps investors easily identify when the market is overbought or oversold. If RSI is below 30, it usually shows that the price is near its lowest point. If the RSI is above 70, it usually shows that the price is near its highest peak and is at risk of falling.
By using it, the investor focuses on the signals. Trading strategies suitable for the forex market trend are down, RSI usually does not exceed level 70 and is often lower than level 30. Meanwhile, with an uptrend, the Relative Strength Index often remains above level 30 and is often lower than level 30. higher than level 70.
Based on these manifestations, investors can predict the possibility of a price trend reversal in the future. For example, if the RSI fails to reach the 70 level during multiple price swings in a continuous uptrend. This may indicate that the uptrend is weakening and will likely change to a downtrend.
Apply RSI divergence methods in trading
What is RSI? How is the Relative Strength Index divergence method in trading sessions applied?
Combine in-depth RSI with Bollinger Bands indicator
Bollinger Bands are often considered a highly lagging indicator. Because its signals appear after the price has changed. On the contrary, RSI is considered a fast indicator. Because it shows market momentum more quickly than price.
A quick indicator like RSI can help us grasp market information quickly. It forecasts future price movements. However, the signals from this indicator can be misleading or noisy because the ability to accurately predict future price movements is not easy.
On the other hand, a lagging indicator like Bollinger Bands. Although it provides slower information about actual price movements. But it often provides signals with higher accuracy and reliability.
Hence the combination of a fast indicator and a slow indicator. Bollinger Bands and Relative Strength Index, for example, can be considered a perfect combination. Because they can support and complement each other, compensating for the disadvantages of each type of indicator, while still retaining the advantages of each type.
Apply the RSI divergence with the Failure Swing method
In this method, investors focus on observing the Relative Strength Index when it reaches overbought or oversold levels to make trading decisions.
First, we wait for the Relative Strength Index to enter the overbought or oversold limit zone. After that, we continue to observe and wait until RSI breaks out of this zone. By monitoring the action, we wait until the Relative Strength Index surpasses the previously established high or low before making a trading decision.
Incorporate in-depth RSI into the reversal pattern method
Unlike the scalping method that traders often use, this method forces traders to wait for the Relative Strength Index to enter the overbought or oversold area. When both of these conditions occur, we can consider opening a trading order.
Instructions for analyzing the RSI index to determine price trends
What is RSI? Below Forex Trading will guide traders to analyze the RSI index to determine the most accurate trend price.
In-depth RSI indicates overbought and oversold levels
The rules for trading the strategy combining Bollinger Bands and Relative Strength Index are quite simple as follows:
- Open a buy order when RSI is below 30 and the price touches or breaks through the lower band of the Bollinger Bands (position 1 in the example below).
- Open a sell order when RSI is above 70 and the price breaks through the upper band of Bollinger Bands (position 2).
However, there is an issue that needs to be noted, which is that no trading method has a 100% success rate. In the example above, we can see at position 3. RSI was below the 30 level for a long period. The price has broken through the lower Bollinger Bands several times, but the price continues to decline.
Although the price has since increased sharply. But you may have encountered some previous stop-loss orders if you opened a buy order too early. To limit risks from this problem, it is necessary to strictly follow the principles of stop loss and capital management. In addition, it is also possible to combine other tools such as candlestick reversal signals. Support and resistance levels to increase the likelihood of trading signals being successful.
Identify RSI divergence and Bollinger Bands
In addition to using basic Bollinger Bands and RSI signals about overbought and oversold. We can also take advantage of another strong signal from RSI, which is price divergence.
We see RSI and Bollinger Bands are both at oversold levels. But the price only increased slightly and then turned back down. Initially, it seemed like this was a buy signal. But a trading order following this signal ended with a big loss. However, we then see the price once again at oversold levels according to both indicators. And the Relative Strength Index has created a clear bullish divergence. At this time, the buy signal becomes much stronger. Traders will see the result as the price enters a strong uptrend afterward.
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What are Swing Rejections on RSI?
Another strong signal generated by the RSI is when it bounces back from overbought or oversold areas. This signal is called bullish “volatility negation” and consists of the following 4 steps:
- RSI dropped into the oversold zone.
- RSI crossed back above the 30 level.
- The RSI dropped from a high to a new low but did not return to the oversold zone.
- Then, the RSI increased and broke the recent high.
Similarly, a bearish “volatility negation” signal also includes 4 steps:
- The Relative Strength Index technical index increased and entered the overbought zone.
- The relative Strength Index dropped below 70.
- RSI increased from the peak to a new high but did not return to the overbought zone.
- After that, the Relative Strength Index decreased and broke the most recent peak.
Summary
This article is Forex Trading‘s summary of the Relative Strength Index and related issues. Hopefully, through this article, you have understood what is RSI, and its meaning as well as awareness of the limitations of this index, helping you make the smartest investment decisions. To easily use this indicator on the trading application.
FAQs
What are the ideal conditions to open orders based on the RSI indicator?
The optimal condition for opening an order based on RSI is when the moving average of the Relative Strength Index is increasing over consecutive candles, and the RSI reaches a value below 70. The moving average will determine the trend, while An RSI below 70 will ensure that the trading decision is not influenced by an overbought situation.
What are the ideal conditions to exit the market based on the RSI indicator?
The ideal condition to exit the market based on the Relative Strength Index indicator is when the moving average of the RSI continuously decreases. Investors recorded at least a minimum profit before deciding to leave the market or face a loss.
What is the average or default period used to calculate RSI?
The average or default period for which the Relative Strength Index is calculated is 14 days.
