Now you've learned about the RSI indicator. But you need to know how to use it effectively. It's time to look at how to trade with the Relative Strength Index (RSI). Here are some examples of RSI settings for use in various trading strategies:
RSI Indicator Strategy: OBOS Levels
If the RSI is below 30, it indicates that the market is in the oversold zone, and the price may eventually rise. Once the reversal is confirmed, a buy trade can be placed. Conversely, if the RSI is above 70, it indicates that the market is in the overbought zone, and the price may soon decline. After the reversal is confirmed, a sell trade can be placed. The 50 level is the midline separating the upper (bullish) and lower (bearish) zones. In an uptrend, the RSI is typically above 50, while in a downtrend, it is below 50.
RSI Strategy: Two-period Divergence
Apply the short-term RSI (RSI 5) above the longer-term RSI (RSI 14) (default), and then monitor for crossovers. With the RSI 14, there are times when the market doesn't reach oversold or overbought levels before a trend reversal occurs. The short-term RSI is more reactive to recent price changes, so it can show early signs of reversals. When the RSI 5 crosses above the RSI 14, it indicates that recent prices are rising.
A buy signal occurs when the 5-period RSI crosses against the 14-period RSI when the blue RSI 5 is oversold (below 30). When the 5-period RSI crosses below the 14-period RSI, it indicates that recent prices are declining. The 5-period RSI crosses against the 14-period RSI when the 5-period RSI (blue RSI) is overbought (above 80). Experienced traders may find that their trading performance significantly benefits from combining the RSI trading strategy with Pivot Points.
RSI Indicator Strategy: Relative Strength Index Trend Lines
Connect the highs and lows on the RSI chart itself and trade the trendline break. To draw an upward RSI trendline, connect three or more points on the rising RSI line. A downward trendline is drawn by connecting three or more points on the falling RSI line. A break of the RSI trendline may indicate a potential price continuation or reversal. Keep in mind that a break of the RSI trendline usually precedes a break of the price chart trendline, providing advance warning and a very early trading opportunity.
Source: MetaTrader 4 Example - EURUSD - Please note: Past performance does not indicate future results, nor is it a reliable indicator of future performance.
RSI Strategy: Classic Divergence
A bearish RSI divergence forms when the price makes a new, higher high, while the RSI declines and forms a smaller high. You'll typically see an RSI divergence forming at the top of a bull market, and this is known as a reversal pattern. Traders anticipate a reversal when the RSI diverges. It's a pre-reversal warning, appearing in several candles before the uptrend changes direction and breaks below its support line.
Conversely, a bullish RSI divergence will form when the price makes a new lower low and the RSI makes a higher low. This is an early warning signal that the trend may change from a downtrend to an uptrend. RSI divergence is widely used in forex technical analysis. Some traders prefer using higher time frames (4-hour or daily) to trade the RSI. Using these best RSI settings, you can generate multiple buy and sell signals from the RSI.
