How to Use the Relative Strength Index RSI Indicator in Trading

How to Use RSI Indicator

We would recommend applying several RSI indicators on the chart with different settings and then seeing which signals work better. Use a Libertex demo account to practise this technique. On the daily BTC/USD chart, you can see that the RSI indicator was in the overbought area several times. However, the direction of the pair didn’t change due to the strong uptrend. Moreover, if the indicator doesn’t go far in overbought or oversold territory, it’s more likely that the trend will continue. The RSI was developed in the 1950s by Welles Wilder. Wilder was a well-known trader and author who is also credited for developing other indicators.

And that’s usually a pretty good time to be looking for buying opportunities. When your average gain is greater than your average loss, and this pretty much means that the size of yourbullish candlesis larger than thebearish candles. The formula for theMACDline is 26-period EMA − 12-period EMA.

What is the RSI?

There is no Holy Grail as most already know, but something that would create a solid indication of where to enter and exit a trade, along with it confirming a trending market. If the EFC Indicator’s basic premise is to clarify which way to trade and WHEN, I’d see that as being halfway there. Married to a sane breakeven philosophy, it would restore the below average retail trader’s faith in ultimately getting to the positive side of the ledger….. Have used RSI to verify what price action is telling me, but not with 50 period low or high. Once we see that we had a low, the last 50 candles, and the RSI is BELOW 20, we can move to the next step. It is going to break the current trend and move the other direction. The RSI trading strategy is effective for cryptocurrencies as well.

How to Use RSI Indicator

It is basically a move to overbought levels, followed by a lower high beneath those levels. Chart 8 shows Texas Instruments with a bearish failure swing in May-June 2008. At the same time, you know the stock market is in a long-term uptrend and most pullbacks would lead to a resumption of the trend. However, just because the stock market is in a long-term uptrend doesn’t mean it goes up every day. So if an economy progresses over time, it will be reflected in the stock market with higher asset prices. The stock market is in a long-term uptrend because it’s a reflection of a country’s economy. For starters, swing trading is a methodology that seeks to capture “one move” in the markets.

Example of Positive-Negative RSI Reversals

What I’m going to share with you is a very objective way to define the trend using the RSI indicator. It’s something that, I’ve never seen anyone talk about before. In today’s video, I’ll be discussing the RSI indicator also known as the Relative Strength Index.

  • An RSI trading strategy using the Relative Strength Indicator is a great place to start when day trading and forex trading.
  • If you want to buy, wait until the index crosses the 30-level bottom-up.
  • We also have training for Forex Basket Trading Strategy.
  • When the RSI crosses above the 50 mark and is headed upward, it is a bullish indicator until it reaches the 70 mark.
  • Because remember when the RSI value goes down lower, there’s a stronger bearish momentum in the markets as the average loss is much larger than the average gain.
  • Hence, RSI is a reliable indicator for crypto traders.

Chart 7 shows Research in Motion with 10-day RSI forming a bullish failure swing. Before getting too excited about divergences as great trading signals, it must be noted that divergences are misleading in a strong trend. A strong uptrend can show numerous bearish divergences before a top actually materializes. Conversely, bullish divergences can appear in a strong downtrend – and yet the downtrend continues.

What Is the Difference Between RSI and Moving Average Convergence Divergence (MACD)?

Once we determine this low or high, then we can move on to the next step. I drew vertical lines on the price chart so you can see the 50 candle low that we identified. If you need to use horizontal lines on your chart to verify that the candle has closed the lowest of the How to Use RSI Indicator last 50, you can do so. This is not necessary but may be helpful for you to do and see how strong the trend is. Although crypto traders can easily use the above RSI trading strategies, we have something that is adjusted to the volatility of the cryptocurrency market.

  • An indicator which shows the supply and demand zones in all timeframes would really be useful.
  • This is critical when we are looking for overbought or oversold conditions and readings.
  • When your average gain is greater than your average loss, and this pretty much means that the size of yourbullish candlesis larger than thebearish candles.
  • It quickly became one of the most popular oscillator indicators for traders in financial markets.
  • A break of an RSI trendline precedes an actual price reversal or continuation in the market.
  • This will help you confirm a new trend and avoid a false breakout.

The same is true in an uptrend, although there we would see lower highs in the RSI, while higher highs are still being reached on the price chart. The Relative Strength Index also delivers divergence signals that could be a viable trading opportunity.