How to Trade RSI in Forex

The Relative Strength Index is a momentum indicator that forex traders should learn how to use.It is used to measure the price of the currency being traded relative to itself over a fixed period of time.It is normally 14 bars on a scale of 0 to 100.It shows the forex trader the ratio between the number of periods that closed up and those that closed down.

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.

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