The RSI (relative strength indicator) is one of the most popular technical indicators for trading the forex market. In short, it helps traders identify when the market has become overbought or oversold and is due for a correction. This technical analysis indicator, like others, is best used along with other indicators to improve the quality of the trading signals that are received.
While the RSI extremes (overbought and oversold levels) often indicate a point at which the market usually rebounds, there is no guarantee that the market will actually retrace at those levels. As a matter of fact, the market often ignores the RSI extremes and continue to rally (in bullish markets), or fall (in bearish market) when market events cause an aggressive revaluing of an instrument. As a result, using the RSI technical indicator by itself does not form a complete and robust trading system.
RSI Trading System Chart Setup
This RSI trading strategy relies on the use of chart patterns, pivot points as well as EMA lines. In essence we are looking for trading signals that suggest that the market will be turning from a previous overbought or oversold position. It is generally a good idea to only trade in the direction of the current market trend, as this give the trade a better chance at being profitable.
The advantage of trading according to the market trend is that there is some forgiveness in the market when this is done. Even if traders make the mistake of selling low, or buying high, the trade may still be profitable if the trend remains intact. This strategy uses a:
- RSI(9) on all charts
- EMA(100) on all charts and
- Pivot Points
Trading Signal – When to Buy
Buy a strong bullish engulfing candle close, that occurs off an oversold position, and there is no EMA or Pivot Point resistance that is within 20pips of the candle close. See figure 1. Investors should avoid using a buy trading signal if:
- The new candle becomes immediately overbought on the RSI.
- There is significant pivot point, or EMA line resistance that could stall the current move.
- Avoid trading just before a major news release or when the major markets are closed
Trading Signal – When to Sell
Sell a strong engulfing bearish candle close, that occurs off an overbought position and there is no EMA or Pivot Point support that is within 20pips of the candle close. See figure 1. Investors should avoid using a sell trading signal if:
- The new candle becomes immediately oversold on the RSI.
- There is significant pivot point, or EMA line support that could stall the current move.
- Avoid trading just before a major news release or when the major markets are closed.
Choosing Trade Signals
Using higher defined trading rules, to quality trade signals, will allow for better trades to be made, while at the same filter bad signals. As a general rule, only high quality trade signals should be taken, all other trade signals should be ignored if they look iffy, as traders can ensure themselves that many more excellent trading opportunities will come in short order.
Also, avoid trading just before significant economic data is released or when the major financial markets are closed to improve profitability.
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