Rsi trading system forex
An RSI of over 70 is considered overbought. When it below 30 it is considered oversold. Trading based on RSI indicators is often the starting point when considering a trade, and many traders place alerts at the 70 and 30 marks. When the alert is triggered, the trader will examine the validity of a trade. The RSI can give false signals, and it is not uncommon in volatile markets for the RSI to remain above the 70 or below the 30 mark for extended periods.
Identifying Trading Setups Using RSI Here are some steps to implementing an intraday forex trading strategy that employs the RSI and at least one additional confirming indicator: Monitor the RSI for readings indicating the market is overbought or oversold. Consult other momentum or trend indicators for confirming signs of an impending retracement. For example, if the RSI shows oversold readings, a retracement to the upside is anticipated though not necessarily confirmed. It is considered good practice to look at initiating a trade looking to profit from a retracement if one of these additional conditions are met: The moving average convergence divergence MACD has shown divergence from price for example, if the price has made a new low, but the MACD has not and has turned from a downslope to an upslope.
The average directional index ADX has turned in the direction of a possible retracement. If the above conditions are met, then consider initiating the trade with a stop-loss order just beyond the recent low or high price, depending on whether the trade is a buy trade or sell trade, respectively. Article Sources Investopedia requires writers to use primary sources to support their work.
These include white papers, government data, original reporting, and interviews with industry experts. Suddenly, the RSI line enters the area, creating an oversold signal. Shortly afterwards, the RSI line starts increasing, while the price action continues its downward movement. This creates a bullish divergence between the price action and the Relative Strength Index.
Your first thought might be that you should open a long trade at the moment when the RSI line breaks the oversold zone upwards. However, during this time, you identify the bullish divergence, meaning that it might be better to wait for two or three bullish candles in a row as the actual entry signal. You should place a stop loss order right below the bottom created at the moment of the reversal.
This is shown with the red horizontal line on the chart. The price action increases afterwards and enters a bullish trend. The RSI line increases as well. The trade could be held at least until the RSI indicator reaches the 50 mark, at which point you could close a portion of your position. Alternatively, you could decide to use some other price action clues that provide sufficient evidence to close the trade.
But absent that, it would be wise to exit the trade in full when RSI reaches the overbought threshold of The red circle on the chart shows the moment when the RSI indicator enters the overbought area, creating a close signal. As with most other leading indicators, the Relative Strength Index can be prone to giving false signals. Therefore, you should incorporate an approach that will allow you to isolate as many false signals as possible, increasing your Win-Loss ratio.
In this next section, we will discuss some of the way you can use the RSI tool in combination with price action to increase your chances of a winning trade. However, you will also confirm the price direction with a price action pattern.
This could be a candlestick pattern or a chart pattern, as well as a trend line, channel, ascending or descending tops and bottoms, etc. When you identify the turning point on the chart, you should place your stop above that most recent swing. However, if you spot a price action clue that provides evidence for the end of the price move, you should also take that into consideration for closing the trade.
The image illustrates 5 trade setups based on RSI signals combined with price action. The first trade comes after the initial price decrease. The RSI enters the oversold area and creates a bullish divergence as well. At the same time, the price action breaks a Falling Wedge in bullish direction. So, we have a bullish price action signal and two bullish RSI signals. The price enters a consolidation afterwards creating the blue triangle on the chart.
The triangle breaks through the lower level creating an exit signal. However, the bearish triangle breakout appears to be a false signal. Therefore, you can use this event to reopen your bullish trade placing a stop loss order below the created bottom under the blue triangle.
A closing signal appears when the RSI line enters the overbought area. Now we see the RSI line enters the overbought area. It breaks out afterwards and the line starts decreasing. However, the price action is still increasing, which creates a bearish divergence. At the same time, an Expanding Triangle is formed on the chart. The triangle has bearish potential and the breakout through its lower level should be used as an entry signal for a short trade. The stop loss of the trade should be positioned above the top of the Expanding Triangle.
The position should be closed when the RSI line enters the oversold area. Now that the RSI enters the oversold area, we get a new bullish signal. However, a bullish price action signal is needed as well. Fortunately, another Expanding Triangle appears on the chart that has bullish potential.
Also, take note that the end of the triangle meets a support area black which indicates the potential bottom below the blue triangle. This increases the chances that the price will initiate a bullish move. Therefore, you could open a long trade when the price breaks the Expanding Triangle upwards. The stop loss on the trade should be positioned below the bottom of the Expanding Triangle. You could exit the trade when the RSI enters the overbought area.
The RSI line keeps bouncing in and out of the overbought area. In the meantime, the price action creates a range , which could be seen in the black channel on the chart.
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