I decided to write about the How to use RSI indicator, because often use RSI indicator to work as one "of" the indicators used.
Relative Strength Index RSI - Relative Strength Index is the most popular counter-trend oscillator signals and, in fact, the overbought - oversold a commodity or currency.
RSI indicator is also used to identify divergences, different graphical models, more precise support and resistance levels. Still, in my opinion, you can see the depth of the market at large FFs, where else can fall or rise.
I do not use just one indicator, but to build a profitable trading system by, for example, two moving averages and RSI indicator index is possible. In addition, he is at the bottom of the terminal, and it does not interfere in the work.
So, first things first:
Relative Strength Index RSI indicator was invented by Welles Wilder and explained in his book "New Concepts in Technical Trading Systems".
The basic formula for the calculation looks like this:
RSI = 100 - (100 / (1 + U / D))
where:
U - average number of positive price changes;
D - average number of negative price changes.
RSI indicator calculates the ratio of price changes within a certain time period and is reflected at the bottom of the terminal with a scale from 0 to 100.
Wilder recommended using a 14-day, taking it as a half cycle in the markets. The same period is the default setting on all terminals. I'm using the 3-14 frequency, depending on the timeframe. I think too much frequency strongly smooths out the market, and the index loses its relevance.
A value near zero means a strong oversold market, and a value of about 100 - strong overbought. But it happens rarely, RSI indicator (14), so there are conditional levels 30 and 70 near where the fun begins ... namely:
How to use RSI indicator - Failure Swings (failure swing) or false vibrations.
False oscillation consists of, for example, the top formed by the RSI, which goes beyond the level of 70 and a neighboring peak, with a peak below the previous one. A sell signal can be considered a situation when overcome by the lower point between the peaks of heights. Same with the buy signal, the inverse scheme with two peaks, troughs directed downward, and the breakdown of the highest point between them in the upward direction.
Example:
Ideally, of course, when the price goes far beyond the RSI indicator levels of 30 and 70, especially on the daily charts, such events can not be passed and they are very easy to detect.
How to use RSI indicator Divergence RSI.
The best model of divergence are the major time frames, I begin to look closely to the divergence from the daily chart, anything below that - it rarely leads to working out. Especially careful to follow the trend and its strength, because counter-trend indicator, and a strong trend in price is usually "sticks" to one of the levels and such ugliness can last a long time, example - today's gold.
To search for patterns of divergence is better to use 14-day RSI indicator. The divergence is confirmed by the inability to achieve an indicator of its previous peak, while prices in the chart do it, and it even goes further, as it were, showing that the market is technically stronger at the moment.
Example:
Do not, of course, rely on the divergence, but to see her. Deaver could not deploy the trend, but a decent result in the correction can easily, especially if there are at large FFs.
It is hard to sum it all under a certain rule of inputs and outputs, if we construct our system based on the RSI indicator, but it is possible to identify the most salient points:
Always follow the trend! Indicator makes this an excellent opportunity. For example, one of the problems for traders on the trend, is the entrance to the market after a strong movement. Often this movement makes the market overbought or oversold, that does not create favorable conditions for the transactions. The solution is a simple rule - do not sell if the price is above the level of 70 or below 30, our trade should not fall on signs of repurchase or resale.
There is also a great opportunity to use the RSI indicator to exit the market (profit). Always nice to look at how to grow their own profit, but you need time and be able to fix it. To help us come fast RSI (3-5), which is very sensitive to market changes. For example, if a long position when the RSI (14) comes to around 70, and RSI (3) went to 100, then it is likely recoil and better earnings record.
RSI indicator is convenient to denote the RSI indicator at the support and resistance levels and trend lines, which break through on the display ahead of the events taking place on the chart.
There are many options and display techniques of working with him, and I do not think they are all exhausted, many traders likely will take advantage and its effective performance.
I wish you all successful trading, be disciplined in the market, and remember that RSI indicator - just one of many tools that help traders to focus on the very difficult financial market Forex
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