The Relative Strength Index (RSI) is widely used indicator by forex traders. This indicator is automatically available on existing MT4 devices so that it can be used as a tool for forex trading analysis. Simple trading strategy but profit with RSI can actually be done and can also be a consistent forex profit trading system if you can take advantages of this indicator.
RSI is included in the Oscillator indicator category, meaning this indicator is in the same group as the Stochastic Oscillator previously discussed. In other words too, this indicator makes use of available data to be displayed in the form of “waves” and this wave is a reference for traders to buy or sell entries. And like other Oscillator families, their using is similar, namely the presence of oversold and overbought values.
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In appearance, this indicator is outside the main chart and occupies a separate column. Therefore, we must connect the motion of the RSI with the candlestick above it. For more details, we can see the following picture.
Display of RSI on Chart
In the picture above, the RSI is outside the main chart and has a line to indicate bullish or bearish strength. Figures that are considered oversold if the RSI line is below 30 and the overbought number when the RSI is above 70. These two figures will be the benchmark later for analysis and entry for traders.
RSI itself will automatically be worth the 14th period by reference to the data collection at the closing price. We can change this value according to our wishes or in accordance with the trading techniques that we will use. But keep in mind, that there are consequences with the display RSI if we change the data input so we need to be careful in replacing existing parameters.
Just like Bollinger Bands, the RSI parameter display is also available as follows:
- Close, RSI will calculate the line display using the last closing price data from a candlestick.
- Open, RSI will calculate the line display using the initial opening price data from a candlestick.
- High, RSI will calculate the line display using data from the highest value of the candlestick.
- Low, RSI will calculate the line display by using data from the lowest value of the candlestick.
- Median Price, RSI calculates the line display by using the middle value of the highest value and the lowest value of the candlestick.
- Typical Price, RSI calculates the line display by using the average of the highest value, the lowest value and the closing value of the candlestick.
- Weighted Close, RSI calculates the line display using the average of the highest value, the lowest value and the closing value of two candlesticks.
- Previous Indicator Data, RSI calculated using the previous indicator data.
- First Indicator Data, RSI calculates using data from other indicators that first existed.
Period is the value of the number of candlesticks that are counted, so if the picture above stated 144, it means that the data is calculated from 14 previous candlesticks. Arguably, this RSI is a combination of the Stochastic Oscillator from the side of the display seen on the screen and Bollinger Bands from the application side of the input parameters that will be used as an analysis factor.
How Does RSI Analysis?
Quite easy, as already stated that we only need to see the RSI line. When the RSI line passes the 70 mark which is the oversold value limit, then possibly the price will go down and we can take a sell order. Conversely, when the RSI line falls below the value of 30, which means the market is oversold, we can buy in the hope that prices will reverse direction.
Values 70 and 30 are not absolute marks. We can order higher or lower than what is stated if needed, for example when the market is in a strong trend condition. Under these conditions, the RSI line can move well below 30 or above 70, even holding above that level for a long time. So, keep in mind if you want to fight the direction of the trend whether it has formed a sign will turn around or not.
RSI and Candlestick Crucial Points
The picture shows the pattern of price changes when the RSI approaches the oversold and overbought area. When the RSI approaches oversold, the candlestick also reverses direction and goes up. Meanwhile, when the RSI starts approaching the overbought area, the candlestick slowly reverses direction and goes down. In other words, we can do an entry buy when the RSI line approaches the oversold area at 30 and sell when the RSI line approaches the overbought area at 70.
We can set stop loss using the pips approach, it can be 50 pips or other numbers. It could also use the rule half of the daily movement average. If the daily average movement is 80 pips, then the stop loss can be set at 40 pips. Or with other approaches such as round numbers, resistance or Fibonacci support. While we can set the profit target according to the RSI movement. Take profit when the RSI approaches the opposite saturated area or use pips or other approaches such as resistance and Fibonacci support.
What to Look For?
This indicator cannot capture sudden movements, so it is not suitable for those whose trading models require speed and accuracy of prices. In small time frames, RSI will give signals that are often wrong, especially time frames under 1 hour (H1). Therefore, a suitable time frame used for this indicator is H1 to daily (D1).
Sometimes, prices change before the RSI line touches the oversold area below 30 or overbought above 70. This happens because the indicator measures using the candlestick in the past, which sometimes still does not show a change. Minimizing the period value can be an option, but be careful with the possibility of an incorrect signal being formed because the period is too short.
Another thing to remember is about the strength of this indicator when there is strong news. At that time, RSI will not be quick to respond to what is happening, just like other indicators. Therefore stop loss is always activated and if necessary, no need to trade ahead of a news release that has a strong impact.
Enlarging the period value or replacing data input can also be a danger if not done carefully. Every data input that changes will have an impact on the display of the RSI line on the screen, so we must check before using it as data analysis material.
Finally, as another indicator, this RSI can also be a forex trading technique that can generate consistent profits as long as it is carried out with strict regulations and is not violated. Simple trading techniques but profit can be achieved provided that the trader himself complies with the rules of stop loss and financial management.