So, I’m a relatively new forex trader, but I’ve been gaining experience and slowly familiarizing myself with the plethora of tools and strategies that are available to us traders. Recently I discovered the RSI, and I have been having a decent run gaining pips using close to solely the RSI to predict changes in trends, primarily on the 4 hour charts. I want to ask the experts out there, if this is a good strategy, what they think of the RSI and how to best apply the RSI. Detailed answers are greatly appreciated.
Well I wouldn’t call myself an RSI expert but I used to use it in the past and had good experience with it.
For example:
When the RSI line closes below 30, it means that it is oversold in that particular timeframe. Then I zoomed down to a lower timeframe such as 1hr or 15min and would pick out the key resistance levels. When price broke above these levels with good momentum, it confirmed to me that the oversold condition on the higher timeframe was likely over and I could therefore buy and set a stop below the nearest key support on the lower timeframe. I would then take profit when I reached a 1:1.5/2 ratio, usually depending on the way the market was behaving.
I hope that makes sense. Of course, there are many ways to use it and this is just how I used it. At the end of the day, the RSI basically shows which way the momentum is going and whether or not it is overbought or oversold.
The reason why I moved down to lower time frame to wait for confirmation of a breakout in the opposite direction is because the RSI can stay below/above the oversold/overbought levels for a long time and buying/selling solely because it reaches these levels can be dangerous.
I used to use it but stopped. I was entering or staying out of trades because rsi showed overbought or oversold, then watched as price continued on its merry way regardless.
Any indicator can be useful if you use it properly and spend the time learning it. I think one of the biggest misconceptions is that if the RSI is above 70 it is an automatic sell and if it is below 30 it is an automatic buy. You always need to use it in context with other aspects of technical analysis and never trade based on one signal alone.
Adding to what the folks have said here, you can always read online articles on this indicator.
I did watch this video online not quite long ago on RSI indicator, it featured it’s importance, how to best use and some other things.
You can see the video here: RSI - Profiforex Forex Broker it might help.
I am old school chartist, so indicators are not my main tool. I might use them as an additional tool to help fine tune trades. If it is the only tool to use (not recommended), then i would stick to longer time frames (4H, 1D, 1W) to get a more reliable signal. There are times when it simply does not work. It is good to have an Exit Plan “B” when that happens. It is better to combine RSI with a trend following tool (lines, price filters…)
As mentioned, the strongest signals are divergences in trending markets. For ranging markets you can use extreme readings. It is also possible to adjust the parameters to 5 instead of 14 for faster readings (but less reliable) and adjust the ranges to 80/20 instead of 70/30. The use of trend lines and SP and RS levels is also applicable on RSI. Breakouts on RSI often happen before you see it on the price, hence it is called a leading indicator.
Solely RSI? Guess without help of other indicators or manual analysis it’s similar to gambling. I use RSI just to get additional confirmation on some trends, but would never put it as the ground of a trading strategy.