The Relative Strength Index is probably one of the most popular price indicators and it is being used by those traders who are at the beginning with forex trading. However, the indicator might be misleading for most of the traders, as they fail to understand it properly, which leads to some painful mistakes. In this article, we will cover the basics of RSI and we will also try to answer the question: Is RSI good for Forex trading?
General Information about RSI
What is RSI?
It is a technical indicator used to measure the strength of a particular trend, based on the closing price for a given period of time. The most popular period is 14, but other ones could be used, as well. The indicator can have a value between 0 and 100, with two levels being used as a threshold in order to determine in what kind of environment a particular asset is in.
If the RSI is located around or below the 30 level, that means we are in an oversold condition. A value above the 70 level will mean that an overbought condition is in play. Simple enough to understand, but some particularities will need to be taken into account in order to use the indicator properly.
Is RSI reliable?
It could be, but you must apply it in a certain context. Technical analysis is like an art, it can be mastered with time and in order to do that, you must practice and go over a lot of mistakes.
Now, getting back to RSI, let’s take an actual example from the chart. You can see below the EURUSD on the 4h chart and three situations we’ve spotted, two oversold and one overbought.
You can see that the market started to move in the opposite direction each time. The first thing to take into account is to use the indicator on a higher time frame. You could find signals on the smaller time frames, but it will most likely generate a lot of false signals.
The second thing and the last is to take signals that form on the dominant side of the market. In the example above, the pair had been in a bullish trend and buying the pair on oversold conditions would have generated strong signals, as it is highlighted on the chart.