If you are trading a divergence with the RSI indicator, then you would enter a trade in the direction of the RSI, after the price action closes two or three candles in a row in the direction of your intended trade. As we mentioned earlier, the RSI indicator can give many false or premature signals if used as a standalone tool.

Even when combining it with other confirming studies, it is necessary to use a stop loss to protect losses on our trade. The optimal place for your stop loss order is beyond a recent swing top or bottom, created at the time of the reversal you are trading.

The basic RSI rule states that you should hold your trade until getting an opposite signal from the RSI indicator. Again, this could be an overbought or oversold signal, as well as bullish or bearish RSI divergence. But in the practical sense, it makes sense to take your partial or full profits out earlier using other price action based rules or a trailing stop loss.

Let take a look at how a basic RSI trading strategy with the rules we discussed earlier could work. The image shows you a trade entry and exit based solely on signals coming from the Relative Strength Index indicator.

The chart starts with a price decrease which is also confirmed by the bearish direction of the RSI line. Suddenly, the RSI line enters the area, creating an oversold signal.

Shortly afterwards, the RSI line starts increasing, while the price action continues its downward movement. This creates a bullish divergence between the price action and the Relative Strength Index. Your first thought might be that you should open a long trade at the moment when the RSI line breaks the oversold zone upwards. However, during this time, you identify the bullish divergence, meaning that it might be better to wait for two or three bullish candles in a row as the actual entry signal.

You should place a stop loss order right below the bottom created at the moment of the reversal. This is shown with the red horizontal line on the chart. The price action increases afterwards and enters a bullish trend.

The RSI line increases as well. The trade could be held at least until the RSI indicator reaches the 50 mark, at which point you could close a portion of your position.

Alternatively, you could decide to use some other price action clues that provide sufficient evidence to close the trade. But absent that, it would be wise to exit the trade in full when RSI reaches the overbought threshold of The red circle on the chart shows the moment when the RSI indicator enters the overbought area, creating a close signal. Using the RSI indicator in isolation will not likely create a profitable trading strategy over the long run. As with most other leading indicators, the Relative Strength Index can be prone to giving false signals.

Therefore, you should incorporate an approach that will allow you to isolate as many false signals as possible, increasing your Win-Loss ratio. In this next section, we will discuss some of the way you can use the RSI tool in combination with price action to increase your chances of a winning trade.

You would look to open your trade when you find a RSI signal confirming the direction. However, you will also confirm the price direction with a price action pattern. This could be a candlestick pattern or a chart pattern, as well as a trend line, channel, ascending or descending tops and bottoms, etc. The stop loss order should be positioned according to the basic RSI rules we discussed above.

When you identify the turning point on the chart, you should place your stop above that most recent swing. When you see, an opposite signal coming from the RSI, you should close your trade on the assumption that the price action is likely to reverse. However, if you spot a price action clue that provides evidence for the end of the price move, you should also take that into consideration for closing the trade.

The image illustrates 5 trade setups based on RSI signals combined with price action. The price enters a consolidation afterwards creating the blue triangle on the chart. The triangle breaks through the lower level creating an exit signal. A closing signal appears when the RSI line enters the overbought area. The stop loss of the trade should be positioned above the top of the Expanding Triangle.

The position should be closed when the RSI line enters the oversold area. The stop loss on the trade should be positioned below the bottom of the Expanding Triangle. You could exit the trade when the RSI enters the overbought area.

Then you should place a stop loss order above the top of the range. Your trade should be closed when the RSI enters the oversold area. Take Your Trading to the Next Level, Accelerate Your Learning Curve with my Free Forex Training Program.

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Listen UP…. Typically, when the price goes down, the top bar of the candlestick indicates the open price, while the bottom bar shows the closing price. When the price goes up, the bottom bar shows the opening price, while the top one shows the closing price. At the same time, it is also important to know how to calculate the EMA using the following equation:. The smoothing constant SC filters out spikes that would have otherwise given a wrong idea of the price movement of a given currency pair.

It accords more weight and significance to the most recent pricing data. In calculating the RS, the N in the SC equation is set as 14 days. As we had mentioned earlier, the RSI is an oscillator indicator.

This is because the RSI equation above generates a result within the range of zero to As a result, if you were to plot a graph using the calculated RSI values for a given currency pair, the line would oscillate between zero and Keeping a journal of your trades using this indicator can be immensely helpful in learning from bad trades and steering yourself towards more steady returns.

Importantly though, each value generated by the equation has a significance that guides trading. An RSI value that is over 70 shows that the market is overbought. As a result, if the value goes beyond 70, a failure swing top results. In an overbought market, the failure swing indicates a decline in the existing bullish momentum. The graph then starts to slip downwards.

On the other hand, an RSI reading that is below 30 shows that the market is oversold. A figure below 30 triggers a failure swing bottom whereby the bearish momentum slows down, and the trend is reversed.

Being an indicator, the RSI tops out or bottoms out before the actual market reaches its top or bottom. As such, the RSI indicates that a significant reaction or a reversal in the momentum is right around the corner. For this reason, traders can use it to create trading strategies. There is a plethora of trading strategies that rely on the RSI indicator. Specifically, traders use the RSI to identify and subsequently leverage opportunities presented by an overbought or oversold market.

They can also expand its benefits by combining it with other trading indicators, customizing the number of days used in the calculations, or using the divergence strategy.

In forex trading, divergence refers to the instance when the price movement of a currency is opposite to the direction of a technical indicator. All in all, regardless of the approach taken, the RSI indicator has proven beneficial and results in the following RSI trading strategies:. Traders use this strategy to determine whether they should enter a trade or not. The RSI indicates whether a market is oversold or overbought, so the index provides a basis for buying or selling a currency.

For instance, when the RSI is below 30, thereby signifying an oversold market, the price of a currency correspondingly drops. However, this also indicates that the price will very likely rise from the low levels. As such, traders buy when the market is oversold.

Once you have entered the trade, always keep an eye on the RSI. Sell your assets when the RSI indicates that the market is overbought because prices are only likely to drop. Also known as trend following, this strategy entails taking advantage of sustained uptrends, beyond the oversold marker, in order to capitalize on further price improvements.

To enter a buy trade using this strategy, you have first to create an RSI line that captures the price trend from the oversold point onward this line has a positive slope. You will then hold position and exit when the RSI indicates that the market is overbought, after which you will exit the buy trade. Doing this will ensure that you gain the greatest number of pips, thus maximizing your profit. To enter a sell trade, use the RSI to establish the overbought point and subsequently create a line from this point forward.

This line should have a negative slope. You should then enter a sell if the price of the asset goes below the trend line. It would be best to take profit exit when the RSI indicates that the market is oversold.

The Relative Strength Index RSI for day trading and intraday trading is a popular tool. If you don't know how to use it yet, you're in the right place. This article will highlight what makes this indicator special, including what it does, how to calculate it and what traders use it for. We'll also discuss topics such as RSI trendlines and how to trade using the RSI with some strategies like the RSI Two Period Divergence and more.

We'll then help you find other indicators to pair with the RSI indicator to enhance your trading. Before we start discussing the best strategies and settings for using the RSI indicator for day trading and intraday trading, we should discuss some basics. Technical analysis is a method of predicting price movements and future market trends, by studying charts of past market action, and comparing them with current ones.

Technical analysis is concerned with what has actually happened in the market, and what might happen. It takes into account the price of instruments, and creates charts from that data to use as the primary tool. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments simultaneously. There are three main principles in technical analysis that should be covered before taking a precise look at the RSI indicator:.

Technical analysis is used to identify patterns of market behaviour that have long been recognised as significant. For many given patterns, there is a high probability that they may produce the expected results. Additionally, there are also recognised patterns that repeat themselves consistently. Forex chart patterns have been recognised and categorised for over years, and the manner in which many patterns are repeated leads to the conclusion that human psychology has changed little over time.

This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment.

However, pure technical analysts are only concerned with price movements, and not with the reasons for any changes that may occur. One of the indicators that technical analysis is very reliant on is RSI — the Relative Strength Index Indicator. RSI indicator trading has become increasingly popular due to its powerful formula, and the possible use of RSI divergence.

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Whatever the purpose may be, a demo account is a necessity for the modern trader. Open your FREE demo trading account today by clicking the banner below! The RSI measures the ratio of up-moves to down-moves, and normalises the calculation so that the index is expressed in a range of It was originally developed by J. Welles Wilder.

If the RSI is 70 or greater, the instrument is assumed to be overbought a situation whereby prices have risen more than market expectations. An RSI of 30 or less is taken as a signal that the instrument may be oversold a situation in which prices have fallen more than the market expectations.

With this information, we can use the RSI indicator for day trading to our advantage. Contrary to popular opinion, the RSI is a leading indicator. The formula for the RSI indicator takes two equations that are involved in solving the RSI formula. The first component equation obtains the initial Relative Strength RS value, which is the ratio of the average 'Up'' closes to the average of 'Down' closes over 'N' periods represented in the following RSI formula example:. The actual RSI value is calculated by indexing the indicator to , through the use of the following RSI formula example:.

If you are using MetaTrader MT4 , you can attach the indicator on your MT4 chart, and simply drag and drop it to the main chart window. The GIF provided below demonstrates this process:. Let's look at how to use the RSI to trade.

In the next section, we will explain how to use the RSI indicator for day trading and intraday trading. We will now discuss how to use the RSI indicator for Day Trading. For many traders, using the RSI indicator in a day trading strategy is very beneficial. The default RSI setting of 14 periods is suitable for most traders, especially for swing traders. But some intraday traders use different settings when using the RSI indicator for day trading.

They don't like using the 14 setting, because they find that it generates infrequent trading signals. As a result, some traders choose to lower their time frame, while others opt for setting the RSI period a bit lower to increase the sensitivity of the oscillator. Some traders deal with this problem by lowering their time-frame.

Others lower the RSI period setting to get a more sensitive oscillator. Pick the most effective settings for your specific trading style by determining how much noise you are willing to process with the data you receive. Remember that regardless of the setting you choose, as you gain experience with this indicator, you will become better at recognizing reliable signals.

In the case of using the RSI indicator for day trading and intraday trading, you will be making short-term trades.

Here, traders often choose lower settings for all of the variables as this provides earlier signals in this highly competitive environment. As we mentioned above, s hort-term intraday traders usually use lower settings with periods ranging from You are now an RSI indicator pro.

But you need to know how to use the RSI indicator effectively. It's time to look at how to trade with the RSI. Here are some examples of RSI indicator settings to use in different trading strategies:. This can be considered an RSI trendline strategy because it aims to predict when the price will bounce off the trendline, which is an opportunity to enter a trade.

If the RSI is less than 30, it means that the market is oversold, and that the price might eventually increase. Once the reversal is confirmed, a buy trade can be placed. Conversely, if the RSI is more than 70, it means that it's overbought, and that the price might soon decline. After a confirmation of the reversal, a sell trade can be placed. The RSI 50 level is the midline that separates the upper Bullish and lower Bearish territories.

In an uptrend, you will usually see the RSI above 50, while in a downtrend, it is below the RSI 50 level. Depicted: Example of MetaTrader 4 - Mini Terminal - EURUSD - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals CFDs, ETFs, Shares. Past performance is not necessarily an indication of future performance. This strategy is sometimes referred to as an RSI 14 trading strategy.

Apply a short 5 period RSI RSI 5 over the longer default 14 period RSI RSI 14 and watch for crossovers. With the RSI 14 trading strategy, there are times when the market does not reach the oversold or overbought levels before a shifting direction occurs.

A shorter period RSI is more reactive to recent price changes, so it can show early signs of reversals. When the RSI 5 crosses above the RSI 14, it means that recent prices are getting higher. A buy signal is then generated, and a 5 vs. When the RSI 5 crosses below and becomes lower than the RSI 14, it means that recent prices are declining. This is a sell signal. Experienced traders may find that their trading performance greatly benefits from combining an RSI trading strategy with Pivot Points.

Depicted: Example of MetaTrader 4 - EURUSD - ECN Hourly Chart - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals CFDs, ETFs, Shares.

Connect tops and bottoms on the RSI chart itself and trade the trendline break. To draw an RSI uptrend line, connect three or more points on the RSI line as it rises. A down trendline is drawn by connecting three or more points on the RSI line as it falls. The break of an RSI trendline might indicate a potential price continuation or a reversal. Bear in mind that the break of an RSI trendline usually precedes the break of a trendline on the price chart, thus providing an advance warning, and a very early opportunity to trade.

RSI bearish divergence forms when the price forms a higher high, and at the same time the RSI decreases, and forms a lower high. You will usually see RSI divergence forming at the top of the bullish market, and this is known as a reversal pattern. Traders expect the reversal when the RSI Divergence forms. It is an advance reversal warning, as it appears in several candlesticks before the uptrend changes its direction, and breaks below its support line. Conversely, the RSI bullish divergence will form when the price forms a lower low, and the RSI forms a higher low.

This is a warning sign that the trend direction might change from a downtrend to an uptrend. RSI divergence is widely used in Forex technical analysis. Some traders prefer to use higher time-frames H4, Daily for trading RSI divergence. Using these strategies, you can achieve various RSI indicator buy and sell signals.

Depicted: Example of MetaTrader 4 - EURUSD - ECN Daily Chart - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals CFDs, ETFs, Shares. Professional trading has never been more accessible than right now! Open your live trading account today by clicking the banner below!

Along with strategy and settings, we can combine other technical indicators to complement the RSI when using the RSI indicator for intraday trading and day trading. Some of the best ones are momentum indicators. We recommend using the moving average convergence divergence MACD and moving average crossovers. The RSI can maintain overbought readings for quite some time, while the MACD can show divergence by turning down as the price advances, further indicating that the market is overextended and may retrace.

Exponential Moving Averages can help confirm RSI indications. For example, the EMA 5 crossing over the EMA 10 compliments the RSI indicator very effectively. It is so easy to jump and start using the Forex RSI indicator for day trading, that novice traders often begin without testing different parameters, or educating themselves on the proper interpretation of an indicator, because of the desire to grab money quickly!

As a result, the RSI has become one of the most widely misused MT4 indicators.

Depicted: Example of MetaTrader 4 - EURUSD - ECN Daily Chart - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals CFDs, ETFs, Shares. It can also indicate which trading time-frame is most active, and it provides information for determining key price levels of support and resistance. Again, this could be an overbought or oversold signal, as well as bullish or bearish RSI divergence. For example, the EMA 5 crossing over the EMA 10 compliments the RSI indicator very effectively. Exponential Moving Averages can help confirm RSI indications.

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