Many of us have started trading in Forex or any other financial market using technical indicators to open and close positions in the market as if they were all powerful oracles which is not true, as we have learned many painfully. Today we are going to talk about the use of the RSI indicator, one that is incorporated by many traders into their trading strategies. One mistake that many beginners make is to believe that the RSI (Relative Strench Index) signals are in themselves indicative of entering or leaving the market. It is not uncommon to read in forums and sites things like the following:
If the RSI is above 70, then you should sell and if it is below 30 then you should buy. However, much of the time remains between levels 40 and 60 so you do not know what to do.
The first thing any expert will tell you is that you can not rely solely on the RSI to make decisions regarding our operations in the market. This means that this is not an indicator that will give clear signals to open or close positions by itself and with a high degree of reliability. If you rely solely on the RSI, you are making a mistake. Generally, indicators work in combination with other indicators to discover and confirm potential trades. In addition, in the opinion of some experts, the RSI only has a significant value when compared to other indicators.
Second, even if you only use the RSI, or if you use it in combination with other indicators, the 70/30-based “buy / sell” rule is not a rule in reality, but rather a guide Few traders have lost their money trading on the basis of this so-called rule). Generally, when the RSI is at level 70 the market is considered to be “overbought”. However, when it is at level 30, the market is said to be “oversold”. However, even though these readings could be considered in this way, the trader should take into account other factors in the RSI, such as the movement time either at the 70 or 30 level,
Two of the best indicators to use in combination with the RSI are the MACD (Moving Average Convergence Divergence) and the Stochastic Oscillator. Both indicators give information about the momentum, which allows the operator to compare with the information that the RSI is giving.
Something that is seen very frequently in the Forex, is that the RSI seems to be in the middle levels most of the time. However, the reality is that on many occasions the RSI moves at the extreme levels of 30 and 70, what happens is that you have to invest a lot of time observing the price charts to detect these events. The direction of the RSI depends on the price action in the market, and in the days of high volatility in the Forex market, it can be said that the RSI spends as much time in the 70/30 levels as it does in the middle levels . Now, regarding what to do when the RSI moves in the middle levels, this depends on the strategy of each trader since there are some that operate based on these.