How to Use RSI (Relative Strength Index) in Forex

The Relative Strength Index better known as RSI is an indicator often applied by traders in the foreign exchange market to determine whether a particular pair of currencies is overbought or oversold. This article will discuss the ways how proper understanding of RSI and its functioning can be beneficial for you and let you make the most out of your strategies.

RSI is an indicator that moves between zero and 100; this indicator is often displayed below price bars. This tool is useful in ascertaining the speed of an adjustment in price trends so that traders are informed on market conditions. RSI is determined using the average of gains and losses over a given period, normally 14 trading periods and is often used to signal such things as changes in the direction of the market.

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The most frequently applied approach in connection with RSI is searching for overbought and oversold levels. When the RSI value reaches 70 this indicates that the currency pair may be overbought, the price could be too expensive and may soon reverse or correct itself. On the other hand, an RSI value below 30 is taken as a signal that the currency pair may be oversold, thereby suggesting that the prices of the pair may have gone low and is likely to go up.

As for these overbought and oversold levels the analyst should note however they are effective when used in combination with other tools and analysis. A reading greater than 70 does not imply that the currency pair will reverse while a reading below 30 does not necessitate a price up turn. The market can stay overbought or oversold for a long time especially in trending market conditions. It is for this reason that applying the RSI with other indicators or the price action analysis is important, in order to boost the accuracy of trading signals.

Some traders also apply the RSI for divergence analysis. Divergence happens when the price of the currency pair is in contrast to the movement of the RSI. For instance, when the price is charting higher highs while the RSI is charting lower highs may suggest that the trend is faltering, and a reversal is expected. On the other hand, if the price is again making lower lows the RSI though is making higher lows, this could indicate that the bearish pressure is wearing off and that a reversal may be in order.

Apart from that, in forex trading, you can also apply RSI to look for centerline crossover. It is at the 50 level and there is the likelihood that should the RSI go above this line, then there could be a rising bullish pressure. It is important to note that RSI will also cross below the 50 line if the assumption that bearish momentum is present. These crossovers can be useful in defining the broad orientation of these trends.

However, for beginners the approach suggested here can be infinitely beneficial to get the best out of RSI without hasty actions. It is influential, but in order for it to be an efficient tool, it should be used in conjunction with other mathematical tools and combined with market evaluation.

In conclusion, RSI is a powerful weapon in forex trading which helps the trader identifying such as reversal signals, overbought or oversold levels and strength of the continuing trend. In this respect, with knowledge of how to use signals obtained from the RSI and other tools and indicators in the foreign exchange markets, the trader is in a position to improve the trading portfolio and thus the efficiency of the trading portfolio.