1. Buy on RSI From Oversold Territory.

Most forex system use the RSI as a trading signal to figure out when a currency is in either oversold or overbought territory. Depending on the forex trading system, overbought is either above the 70 or 75 region and oversold is below the 25 or 30 region. But signals are triggered in the 30 region and sell signals are triggered in the 70 region.The best option if you are buying using the RSI is oversold territory is to wait until the RSI  is moving out of the oversold region as it’s a better sign of a bullish forex market.

The chart below shows a trade where the RSI(9) moved out of the overbought section and signaled a sell signal .This particular trade held for the rest of the trading session.

2.Buy/Sell when RSI Stalls at the 50 Line

Most professionals forex traders love trading retracements during a strong move or trend . It is also common for the RSI in such situations not to cross either the 30 or 70 line .Instead, most professional forex traders wait for the RSI to dip to or slightly below the 50 line and figure out if it is a buying opportunity.

In this particular forex trading situation, the 50 line in the RSI  is used as support and resistance. The retracement would start when the RSI bounces of the 50 line and normally occurs during a good trend move .In the example below, the up trend in the usdchf was strong and the forex trader could have entered the up trend when the RSI hit and bounced back from the 50 line.

3. Buy/Sell Based on RSI Trend

The 50 line in the RSI can also be used as a trend indicator. This is especially used with the RSI having a longer look back period than 14. Some systems use RSI 45 for this. The idea is that the area above the 50 line signals a bullish signals and the forex trader should only consider buys. The area below the 50 line should encourage to forex trader to only consider sell signals.

In the chart above, you can see that the RSI(9) stays above the red 50 line for the whole up trend. A forex trader could have exited the market at the end of the chart when the RSI went below the 50 line in the trading session.

4. Technical Analysis Patterns in the RSI

One can also use the regular technical analysis patterns on the RSI. You can draw trend lines, support and resistance lines on your RSI chart section. The only problem is that this can be rather tedious on some forex charting packages. However, some charts like fibonacci trader can draw such support and resistance lines and even include moving averages on your RSI chart panel.

All in all though the RSI is a great momentum indicator, a trader should not rely it exclusively for all their signals. However, learning how to use it and interpret it would make your forex trading experience more enjoyable and profitable.

In forex trading, most trading platforms have the look back period at 9 periods though you can use various periods that you can choose. The shorter the period, the more volatile is the indicator thus producing more forex trading signals. The longer the forex trading period, the more stable the RSI is and produces less trading signals.

The RSI is used to measure when the forex market is overbought, oversold or has the momentum or keep on moving in the same direction. The normal levels indicating that the market is overbought is when the RSI moves above 75. To indicate the forex market is oversold, the RSI moves below level 25.

Some forex systems do allow the changing of either the look back period or the overbought or oversold levels. Some forex systems also use the RSI as a trend indicator and would depend on the RSI being either below or above the 50 level.

In the example forex chart below, you can see that the RSI of 9 periods in the usdchf chart rose above level 75 at point A. Soon the market lost it’s momentum and the usdchf started falling.

At point B, the market was oversold and below level 25 soon the usdchf started rising again.

When the market is gathering steam, and approaches or crosses the 75 and or the 25 levels, there is a strong likely hood that the forex currency one is trading would regain or retrace some of it’s previous move.As a good forex trader, one should always understand that a strong likely hood is not the same as a definite occurrence.

Note that at point B, the first time the RSI(9) falls below the 25 line, the market did not stop it’s downward move or trend. That is the main reason why most forex systems are a number of forex trading indicators working together to either confirm or disprove a trading decision.

You always have to be alert as a forex trader as even though the RSI shows either an overbought or oversold condition,the market could just be gaining more steam to continue in the same direction.Many new forex traders misuse the RSI and try to catch market tops or market bottoms using just the RSI. A good forex trader should be aware that buying or selling in anticipation of an indicator is a bad forex trading habit.

For those developing trading forex trading indicators, the RSI is calculated as

RSI =100 – (100/1 + RS)

RS -Average of x periods up closes / average of x period down closes.

x is the look back period which you as the trader can choose.