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Thursday, June 15, 2017

How to Use Relative Strength Index

One of the most powerful indicators used by most of Forex Traders is called Relative Strenght Index. It is developed by J. Welles Wilder. It is a momentum oscillator that measures the speed and change of price movements. 

There are two lines involved in this method. These two lines represent overbought and oversold indicators. Most of forex traders use 70 and 30 levels to help them indicates overbought and oversold condition.

As seen in the picture above, once an overbought signal is triggered, there is an indication for the currency pair to go down. And vice versa, once an oversold signal is triggered, there is an indication for the currency pair to go up.

Normally we will use 30 as the oversold level and 70 as overbought level. It is recommended to use 14 as the period setting in order to get a better reading of RSI.

There will be some time where RSI breaks above 70 level and keep on going upward up to 90 level. In this case, it is a strong bullish trend. It may happen sometimes especially when there is an announcement about increment of central bank interest rate of one particular country related to the currency pair. Wise technical analyst trader will try to avoid entering the market at such moment as price moment might reverse in a second to opposite direction and may cause the trader to suffer from huge lost without giving him/her a chance to overcome the lost.

The opposite scenario might also happen where RSI breaks below 30 and keep on going downward.

RSI is quite reliable to determine oversold and overbought indication, however, it is recommended to use RSI indicator combined with others in order to get a better prediction for the future market.