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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

 

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.

Forex Market Sentiment

The EURUSD is at a major support level, Open an account and start trading EURUSD which is oversold and at a major support level: Read The Article "Support and Resistance levels"

Another reason to start being bullish on the EURUSD and EURJPY is Risk Appetite vs The Risk Averse sentiment used when trading high yielding currencies vs the US Dollar and the Japanese Yen when world economies start reporting data that is supporting economic growth: Read The Article "Risk Appetite vs The Risk Averse"


Eurozone Economic Growth Gains Momentum in November - Eurozone economic growth accelerated to its fastest pace and was at an all-time high, order books grew and factories were prompted to add more workers and raise the prices of their goods as the economic environment in Europe grew the fastest as shown by economic data – November Composite PMI for manufacturing and services grew to the strongest in 18 months and was at an all-time high of 54.1, up from 53.3 in October. There are two PMI data reports - one for manufacturing and the other one for services. The PMI for manufacturing was at an all-time high of 34 months and rose to 53.7 in November while that of services rose to an all-time 11 months high of 54.1; Marking a strong expansion in economic growth and signaling that the recovery in Europe is continuing to gather momentum thanks to the €1.7 trillion quantitative-easing program being carried out by ECB in Europe. IHS Markit has said that companies are on boarding new staff at the fastest pace ever since 2008, as the prices of goods increased the most in five years as companies continued to pass the production cost to their consumers – the November PMI showed the steepest monthly increase in business activity with plenty of signs that the economic growth will continue to accelerate as the inflation in Europe continues to intensify steadily. Open an account and start trading EURUSD and EURJPY today.


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First OPEC Deal on Oil production cut in 8 years fuels more risk appetite: Open an Account Today - Don't Miss Out on the trades


Read The Articles: Eurozone Economic Growth Gains Momentum in November - Fueling Risk Appetite in FX trading


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