To be successful in the foreign exchange market, the most important factor for traders is to have market analysis and evaluation skills. Therefore, many tools have been invented to help investors easily evaluate the market. One of them is the RSI (Relative Strength Index). So what is the RSI indicator? And how do you use the RSI line to trade? Let’s find out with Forex Trading!
Learn about the meaning of what is the RSI indicator.
Recognizing asset price trends can help investors make more effective trading decisions. To do this, specific trend-defining indicator tools are used. And RSI trading is one of the popular indicators favored by many investors. Besides, in addition to RSI, traders can also use the CCI indicator.
Based on the RSI index, investors can easily recognize overbought or oversold conditions in the market. When RSI is below 30, the asset price is nearing the bottom and is at risk of rising. When RSI is above 70, the asset price is nearing its peak and is at risk of falling.
By using RSI, investors focus on signals and trading techniques to find compatibility with market trends. In a downtrend, RSI rarely crosses 70 and frequently hits 30 or lower. On an uptrend, the RSI remains above 30 and frequently touches 70.
Based on this information, investors can determine the possibility of price reversal in the future. For example, if the RSI fails to reach the 70 level for several consecutive price swings on an uptrend. And then dropped below level 30. This shows that the uptrend is weakening and there is a possibility of a bearish reversal.
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What is the exact formula what is the RSI indicator?
The method of calculating the RSI trading index can be presented as follows:
- RSI = 100 – 100 / (1 + RS)
In particular, RS is calculated as the ratio between the total amount of price increase in a period (I(price increase period)) and the total amount of price decrease in the same period (E(price decrease period)). Usually, the period chosen is 14. Since this is the number of days in a working week, 14 hours are in a working day. However, this is only a recommendation and traders have the right to choose the appropriate number as they wish.
What signals does RSI trading provide to users?
What is the RSI indicator and what signals does RSI trading provide to users is a question that many people are interested in. The RSI value range from 45-55 is often considered an area with no special trend. When the RSI crosses this boundary, a new trend is formed and the RSI line will reflect the market trend in the following two ways:
- Buy signal in an uptrend: The RSI line crosses the 50 threshold from below. Or the RSI is in the range of 45-55 and the RSI line crosses the 55 threshold.
- Sell signal in a downtrend: The RSI line crosses the 50 threshold from top to bottom. Or the RSI is in the range of 45-55 and the RSI line drops deeply below the 45 threshold.
In addition, RSI is used to draw Trendline lines. To draw a trendline, we connect the peaks of the RSI index (must have at least two peaks) to create a resistance trendline. We also connect the RSI bottoms (there must be at least two bottoms) to create a support trendline.
From these RSI trendlines, RSI models are formed to recognize the shape of the market. When the price breaks the pattern, that is also when the market reversal signal occurs.
What are the instructions for installing RSI trading lines on MT4?
After understanding what is the RSI indicator, installing the RSI indicator in MT4 will bring many benefits for technical analysis. It is an important tool in the trader’s toolkit.
Reasons to install RSI trading on MT4
There are several important reasons you should install the RSI indicator in your MT4 software:
- Popular and Reliable: RSI is one of the popular technical analysis tools. Similar to pivot point, so what is pivot point? it is a specialized technical analysis tool used to determine the expected support and resistance levels for a certain asset at a specific period. Both RSI and pivot points have been tested and proven to be reliable over the years.
- Ease of use: MT4 (MetaTrader 4) is one of the easiest trading platforms to use. Installing the RSI indicator on MT4 is a simple process that does not require complex technical knowledge.
- Multifunctional: MT4 offers many features and tools for technical analysis. Installing RSI as part of this platform allows you to combine it with other tools and indicators.
- Flexible customization: Customize the parameters of the RSI indicator. Including stages, calculations and overbought/oversold levels.
- Graphs and notifications: MT4 provides detailed graphs detected by the RSI indicator. This helps you monitor and react to potential trading opportunities.
Installation steps what is the RSI indicator?
Below are instructions on how to install the RSI indicator on MT4
- Open MT4 software.
- Select the chart of any product.
- Right-click the chart and select “Insert”.
- In the menu that appears, hover over “Indicators” and select “Oscillators.”
- From the list that appears, select “Relative Strength Index”.
After that, a window displaying the parameters of the RSI tool will appear as follows:
Parameter:
- Period: This is the number of candles used to calculate RSI. The default is 14 candles. You can adjust the number of candles according to your preference.
- Apply to: “Close” means that RSI is calculated based on the closing prices of candles over a period of 14 candles.
- Style: Here, you can choose the color and line style of RSI.
- Fixed Minimum and Fixed Maximum: These are the two boundary values of the RSI indicator, with the lower boundary value being 0 and the upper boundary value being 100. We can adjust the values of the two extreme levels. overbought and oversold in the Level section to display those levels.
- Visualization section: allows choosing the time frame in which the RSI indicator will be calculated and displayed on the window.
Once you have completed your changes, click “OK”.
What are the tips for using the RSI indicator effectively?
One piece of advice for traders is to clearly understand what is the RSI indicator and choose the appropriate time frame for your goals. Avoid making too many changes during trading.
What is trend identification using the RSI divergence indicator?
To determine the trend using the RSI indicator (overbought and oversold), we can apply the following RSI value thresholds:
- Overbought threshold: According to RSI-Wilder, any RSI signal that exceeds 70 is considered overbought. It shows an opportunity for investors to sell the stocks they are holding.
- Oversold threshold: On the contrary, when RSI drops below 30, it is an opportunity for investors to start buying.
In case the RSI is between 30 and 70, this is considered an average state. When RSI is between 45-55, the market is considered to have no clear trend. Investors often wait until the indicators surpass the 30 threshold or surpass the 70 thresholds to buy or sell.
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What is the RSI indicator? How to use normal divergence RSI signals
In addition to using RSI thresholds of 30 and 70 to identify overbought and oversold conditions in the market. RSI offers investors another way to predict trends. Then identify resistance and support levels using bullish divergence (positive divergence) and bearish divergence (negative divergence).
- Bullish divergence (positive divergence) occurs when RSI creates a new low higher than the old one. Meanwhile, the price decreases and creates a peak lower than the old peak. When this signal occurs, it is called a bullish divergence. It shows that the price will tend to increase again despite the downtrend (buy signal).
- Bearish divergence (negative divergence) occurs when RSI creates a new peak lower than the old peak. Meanwhile, the price creates a new peak higher than the old peak. When this signal occurs, it is called a bearish divergence. It indicates that purchasing power has reached its peak limit and the market is losing momentum.
What is the RSI indicator? How to use it with hidden RSI divergence signals
Similar to normal RSI divergence, but RSI has hidden divergence (failure swing), we do not care about the price but only focus on the RSI signal. There are two types of negative divergence as follows:
Hidden bullish divergence:
- RSI drops below 30 points (oversold).
- RSI increased again to surpass 30 points (failure point).
- RSI continues to decrease but is still above 30 points (oversold).
- RSI increased again and surpassed the failure point, this is a buy signal.
Hidden bearish divergence:
- RSI increased to over 70 points (overbought).
- RSI fell back below 70 points (failure point).
- RSI increased but is still below 70 points (under-overbought)
- RSI dropped deeply below the failure point, this is a sell signal.
Epilogue
Above is all the important information about the RSI indicator that Forex Trading wants to share with readers. What is the RSI indicator and for the RSI indicator to achieve the highest accuracy, does the market need to have volatility? This is where asset prices operate in an environment that alternates between rising and falling rather than maintaining a continuous trend.
Frequently asked questions?
What is the RSI indicator? How to trade with RSI?
When using RSI, choosing the appropriate period depends on the trading time frame. In the case of day trading, you can test the strategy with a period of 14. When the RSI line crosses out of the overbought or oversold zone, this can mean that the trend will soon reverse.
How to customize RSI?
There is a rule called the “5% Rule”. You can set a threshold on the daily chart. And the RSI should be less than 5% of the time in the last 3 months at that level. When working with shorter time frames, you should use a smaller period.
For testing, you can start with the 14-hour chart for the RSI, regardless of currency pairs. Reducing the period will reduce the time frame adjustment. Choose a period so that the high/low of the RSI indicator corresponds to the price extremes on the chart.
Is RSI a good technical tool?
No indicator is considered good or bad regardless of the user. Using technical tools effectively requires understanding and skill on the part of the trader. This also applies to the RSI technical indicator.
If a trader has expertise in using RSI, high trading efficiency will be achieved. Practice trading RSI on a demo account and try combining it with other models and indicators. The Relative Strength Index is a good tool if you know how to use it.
