Traditionally, traders have relied on the Relative Strength Index (RSI) to measure the strength of a currency pair by tracking the changes in its closing price.
They look to get long a currency pair as RSI moves above the horizontal 30 reference line. On the other hand, traders look to sell a currency pair after RSI moves above the horizontal 70 reference line and back below it.
- Forex Chart patterns used to analyze price charts can be used on the Relative Strength Index (RSI)
- Forex Trend line breaks of RSI can predict important turning points in a currency pair
- Forex Trend line breaks of RSI are an easy and systematic way to enter and exit the market
RSI trend lines can be used on any chart time frame from as large as monthly and weekly to as small as 15-minute and 5-minute time frames. Traders can benefit from using RSI trendline breaks in their trading to find more timely entries with better precision.
Well, this then essentially brings us to the next pit stop in terms of expanding our assessment of the Relative Strength Index. How do we use this widely acclaimed accurate indicator to maximize the gains on our investment in the forex market?
The RSI gives you clear and precise trade signals that are extremely simple to interpret and execute in your day to day trading action.
Starting from the bottom of the chart, a 0-30 reading stands for oversold conditions thus this becomes the cue for the trader to make an assessment of the point of reversal in the forex market and for the specific currency pair. This essentially this is a bullish signal for the forex market traders and help them to decide on a potential entry point in the market. Thus, this becomes the buying zone in the market.
Meanwhile, when the RSI slips to the other end and the value falls in between 70-100, you have the overbought condition and another point of reversal in the market. It signals the currency pair has hit its roof, and the prices are set for a downward move. In other words, this is the sell signal for the market, and the trader can start initiating the exit strategy at this point. Thus, the top end stands for the bearish end on the chart.
Now we reach the centre point and the strategy when the Centerline is breached. Movement of the graph above the centreline from below it towards the 70 mark stands for a situation where the market is gradually approaching tricky territory and the trader should make preparation for eventual exit and preserving the precious profit.
On the contrary when this line moves from above 50 to below towards the 30, the market is bracing up for a reversal and potential upmove in times to come and cue for traders to start making provision for heightened investment at the right point.
Therefore, the basic usage of this indicator is identifying potential price reversals as well getting an idea of prospective price points that would signal a reversal in the market.
Whether looking for price point to buy around the 30 mark or sell around the 70 levels, the RSI comes handy in raising the first point of alarm in terms of determining when to brace up for a change in trading stance and how best to preserve profits or limit losses.
So almost like crossing the road when you look right and look left, take the RSI, confirm the broad trends, put stops in place and go ahead with your trading positions.