Relative Strength Index RSI Forex Technical Analysis and RSI Forex Trading Signals
Developed by J. Welles Wilder, described in the book “New Concepts in Technical Trading Systems”.
Relative Strength Index is the most popular indicator and it is a momentum oscillator and a trend following indicator. RSI compares a trading currency magnitude of the recent price gains against its magnitude of recent losses price losses and plots this data on a scale of values that ranges between 0-100.
Relative Strength Index measures the momentum of a currency pair; values above 50 signify bullish momentum while values below 50 center-line signify bearish momentum.
- RSI is plotted as a green line
- Horizontal dashed lines are drawn to identifying overbought and oversold levels are i.e. 70/30 levels respectively.
Forex Technical Analysis and Generating Forex Trading Signals
There are several methods used to trade, these are:
50-level Crossover Signals
- Buy signal - when the indicator crosses above 50 a buy/bullish signal is given.
- Sell Signal - when the indicator crosses below 50 a sell/bearish signal is given.
RSI Chart Patterns
Traders can draw trend lines and map out chart patterns on the RSI indicator. The Relative Strength Index often forms chart patterns such as head and shoulders chart pattern which might not have formed clearly on the price chart.
Trading Support/Resistance Breakouts
RSI is a leading indicator and can be used to predict Support/Resistance Breakouts before price breaks its support/resistance level. RSI uses the swing failure signal to predict when price is about to break support and resistance levels.
Swing Failure - Support and Resistance Breakout
- Overbought- levels above 80
- Oversold- levels below 20
These levels can be used to generate Forex trading signals such as when RSI turns up from below 20 after oversold, buy and sell when RSI crosses to below 80 after overbought, sell. These signals are not suitable for trading Forex because they are prone to a lot of whipsaws.
Divergence Trading Setups
Divergence trading is one of the technical analysis method used to trade reversals of the price trends. There are 4 types of divergences that can be traded with this indicator covered in the divergence tutorial on this website.