How to use Relative Strength Index in currency trading

Relative Strength Index - what is it?

This is a technical momentum indicator which measures the velocity and magnitude of price direction and movements. Relative Strength Index or RSI, uses a ratio and rate of the rise or fall of the price direction. It is developed by Welles Wilder in 1978.

RSI = 100 – 100 / (1 + RS )

RS = Average of gains / Average of losses.

Average of gains is the total of the difference from uptrend close price of previous bar and current bar divide by total no of gain bar. Average of losses is the total of the difference from the downtrend close price of previous bar and current bar divide by total no of loss bar. The resultant RSI value is between 0 and 100.

Overbought and Oversold

At level above 70 and below 30, is evidently show an overbought and oversold marker condition. This gives trader an opportunity to trade when the RSI touches and bounce of the 70 and 30 levels. Trades can be executed when the currency price show a dip or surge, inline with the RSI, combined show strong momentum that the price will go up or down depending on the current trend direction.

Reversal

Similar at the 70 and 30 levels, by observing the currency price, you can predict early reversal trades when the RSI drop below 70 or above 30. By looking at the slope of the price chart and the slope of the RSI, you can trade falling or raising trends trades at 50 pips or more. Some trades can explicit up to 150 pips up or down trend.

Divergence high and low

Instead of double top or bottom, you can look for divergence at the currency price and RSI chart. At a higher high points from a divergence high point, you may find a lower high points at the RSI chart, this indicate a weakening trend and may breakout when the RSI fall and cross the 50 mark. You can double check the new trend by comparing with the currency prices trend and you will find potential trades to sell or buy.

Trending touch and go

If you find a currency to be trending and trends are consistently flowing with strong economic figures pushing it for long term, you can use RSI touch and go at the 50 level to execute buy or sell trade. With default setting of 14, you can see many touch and go at 50 level as the trend continues. Because trend up or down will still exhibits support and resistance with a certain degree of divergence which RSI chart can capture those up and down between 50 and 70/30 levels.

You can combine with simple moving average indicator to show the current timeframe trend and higher timeframe trend to show the major direction of the currency.

Source: http://www.bestforexranking.com