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RSI Forex Strategies

Relative Strength Index Indicator Forex Trading Strategy

Relative Strength Index or RSI is the most popular indicator used in Forex trading. It is an oscillator indicator which oscillates between 0 -100. This a trend following indicator. It indicates the strength of the trend, values above 50 indicate a bullish trend while values below 50 indicate bearish Forex trend.

 

This Indicator Measures Momentum of a Currency.

The center-line for the RSI is 50,crossover of the center-line indicate shifts from bullish to bearish and vice versa.

 

Above 50, the buyers have greater momentum than the sellers and price of a currency will keep going up as long as this indicator stays above 50.

 

Below 50, the sellers have greater momentum than the buyers and price of a currency will keep going downwards as long as RSI stays below 50.

RSI Indicator Forex Trading Strategy bullish bearish

RSI Indicator

 

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Euro Zone Quantitative Easing - EURUSD Bearish Market Sentiment

In the example above, when the indicator is below 50, the price kept moving in a downward trend. The price continues to move down as long as RSI was below 50. When the indicator moved above 50 it showed that the momentum had changed from sell to buy and that the downtrend had ended.

 

When the RSI moved to above 50 the price started to move upwards and the trend changed from bearish to bullish. The price continued to move upwards and the indicator remained above 50 afterwards.

 

From the example above, when the trend was bullish sometimes the RSI would turn downwards but it would not go below 50, this shows that these temporary moves are just retracements because during all these time the price trend was generally upwards. As long as RSI does not move to below 50 the trend remains intact. This is the reason the 50 mark is used to demarcate the signal between bullish and bearish.

 

The RSI uses 14 day period as the default period, this is the period recommended by J Welles Wilders when he introduced it. Other common periods used by Forex trader is the 9 and 25 day moving average.

 

The RSI period used depends on the time frame you are using, if you are using day time frame the 14 period will represent 14 days, while if you use 1 hour the 14 period will represent 14 hours. For our example we shall use 14 day moving average, but for your trading you can substitute the day period with the time frame you are trading.

 

To Calculate RSI:
  • The number of days that a currency is up is compared to the number of days that the currency is down in a given time period.
  • The numerator in the basic formula is an average of all the sessions that finished with an upward price change.
  • The denominator is an average of all the down closes for that period.
  • The average for the down days are calculated as absolute numbers.
  • The Initial RS is then turned into an oscillator.


Sometimes very large up or down movement in price in a single price period may skew the calculation of the average and produce a false signal in the form of a spike.

 

Center-line: The center-line for this indicator is 50. A value above 50 implies that a currency is in a bullish phase as average gains are greater than average losses. Values below 50 indicate a bearish phase.

 

Overbought and Oversold Levels: Wilder set the levels at which currencies are overextended at 70 and 30.

Market Sentiment 2015:

Quantitative Easing(QE): This is when a Central Bank decides to start printing money to buy Bonds so as to stimulate Economic Growth.

ECB QE: ECB, Euro Zone Central Bank has started Quantitative Easing for Euro Zone so as to stimulate growth in the EU, devalue the EURO and also bring inflation up to around 2 %.

What it Means: This means the value of the EURO is going to depreciate against all other currencies. (Not at once, but gradually)

How Long will the QE Last: From March 2015 to September 2016.

Market Outlook: Very Bearish for EURUSD and EURJPY, - Also for GBPUSD, GBPJPY, and AUDUSD (No Need For Technical Analysis).

Do Not Be Left by This Once in a Lifetime Opportunity: Open an account now and start selling Euros - ECB has got your back on this one - 1.1 Trillion Euros is What Has Been Set For This QE. - Others are already profiting - Read the article How to Fast Track Account Opening and Open an account now.

Strategy: Sell the retracements and use 1 Hour and M15 Charts to look for best entry and exit points.

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