RSI Indicator (Relative Strength Index)

How to use the RSI indicator

#Forex indicators , #Forex for beginners , #Forex for dummies

RSI indicator (abbr Engl RSI -.. R elative S trength I ndex – Relative Strength Index). Today it is one of the most frequently used indicators in the financial markets. Wells Wider introduced the RSI indicator-index into the trader’s set of working tools, who first mentioned it in 1978 in an article for Commodities magazine. More detailed instructions on how to calculate and interpret the RSI Indicator he outlined in his monograph “New concepts of technical trading systems.”

By the way, the name “Relative Strength Index” was chosen at the time not too well. The RSI indicator does not demonstrate the relative strength of the compared trading instruments, but the internal strength of a single instrument, so it would be more logical to call it the “Internal Strength Index”. However, that is, that is, the name given to the indicator has taken root.

Today, the relative strength indicator is a highly sought-after technical indicator that is available in any technical analysis software. However, some analysts adhere to the position that the RSI indicator is gradually losing its effectiveness due to too wide application. Whether this is true or not is a moot point, but the fact remains – the calculation of changes in the values of the indicator allowed many traders to make a considerable amount of capital.

Adding RSI indicator in MT

Relative Strength Index is standard on MT4 and MT5 trading platforms. To add it to the chart of a trading instrument, open the menu “Insert / Indicators / Oscillators / Relative Strength Index”

RSI Indicator Parameters

Relative Strength Index (RSI)

Wilder himself recommended using a 14-day period for calculation, but later began to use 9-day, as well as 25-day indicator calculation periods. In general, the number of unit periods in RSI calculations can be absolutely any, and therefore, before choosing the most suitable one, it is recommended to experiment with them. It is important not to forget that the shorter the calculation period, the more sensitive the indicator will be. And that means a lot of false signals. So be careful when setting up.

Trading system based on RSI-indicator

One of the most commonly used methods for analyzing the indicator is based on the search for discrepancies (divergences), in which the value of the trading instrument forms a new maximum, and RSI does not manage to exceed its previous maximum. The divergence of such a plan suggests that there is a high probability of a price reversal. If subsequently the RSI indicator falls below the last depression, then the so-called “failed swing” ends and is considered evidence of an imminent price reversal.

Simple trading system based on the RSI Relative Strength Index indicator

Opening deals for sale:

  • The indicator has broken the overbought level (70) from top to bottom.
  • On the next candle after the breakdown – we sell.
  • We set the Trailin Stop (floating Stop Loss) to the level of the local price maximum preceding the opening of the transaction. That is, Stop Loss will automatically follow the price of the instrument at a certain distance.
  • We set Take Profit two and a half times further (points) than Stop Loss.
  • If a reverse signal has formed, and Take Profit or Stop Loss has not yet worked, close the deal manually.

For purchase transactions, the reverse is true.

Some simple rules

Remember, there are no indicators on Forex that are not mistaken. The RSI indicator, like any other, requires confirmation of its signals. When building your own trading system, use several indicators.

Follow Mani Management. Never in one transaction risk more than 2 percent of your capital. This approach will protect you from ruin and allow you to consistently make money on Forex using the RSI indicator.

Follow your trading strategy clearly. If you need to open a deal on the RSI indicator, open it; if you fix the result, fix it, and it does not matter if you are in the black. Only following the rules of the Relative Strength Index (RSI) “from and to” will earn.

RSI indicator for MT4 can be downloaded here

RSI indicator for MT5 can be downloaded here

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