If you are a trader, no matter what market you trade in, if you belong to the school of technical analysis, no one knows about indicator tools, and one of the popular tools is the RSI indicator – Relative Strength Index. Join Learn Forex Trading to learn about what RSI indicator is and how to use it through the article below!
What is RSI indicator?
Tool RSI indicator – Relative Strength Index is a tool used to measure the relative strength or weakness of a certain product (be it Gold, Oil, or foreign currency,..), it will compare itself with itself over a certain period, depending on the time frame we trade.
Relative Strength Index – RSI is also an oscillator with an upper and lower boundary ranging from 0-100, often called the overbought and oversold areas, the average line located middle is 50.
By default, when installing the basic RSI tool, it uses period 14, which means the indicator is calculated over 14 candles. Therefore, the RSI indicator will be calculated only when there is price data from 14 candles or more. And the price used for calculation is the closing price of those candles.
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Installation instructions RSI indicator
After you have a basic understanding of the concept of the tool RSI indicator. Our next step is to open this tool settings to the chart screen on MT4 software.
What are the steps for us to install the RSI indicator tool? Operate as follows:
- First, we go to the MT4 software
- Open a graph of any product
- Go to Insert -> select Indicators -> select Oscillators -> select Relative Strength Index
- The steps are as described in the image below
Instructions for installing the RSI indicator
- Then a window will appear with the specific parameters of the RSI tool as follows:
Parameters section
Shows the basic structural components of the RSI tool.
As follows:
+ Period 14 – is RSI calculated based on 14 candles, you can customize the number of calculated candles according to your preferences.
+ Apply to: “Close” means that RSI is calculated based on the closing prices of these 14 candles. You can also choose to calculate based on the opening price (Open). The highest price of the session (High), or the lowest price of the session (Low) depending on preference.
+ Style: Here you can choose the color and lines of RSI.
+ Fixed Minimum and Fixed Maximum: are 2 boundaries of RSI indicator with the lower boundary value being 0 and the upper boundary value being 100.
Level section
Indicates the levels of the overbought and oversold zones. You can customize the values of these two overbought and oversold levels depending on your preferences. The world standard is 30-70 for these two overbought and oversold areas.
Visualization section
The last part is the Visualization part which is quite easy. That’s the part where you choose the time frame that this RSI indicator calculates and whether it appears on the Window screen or not.
The advice is that whatever time frame you trade, choose that time frame. Avoid distractions during trading.
- Then Click OK and you finally have the RSI indicator displayed on the screen of the MT4 software as shown below.
RSI indicator will display
Some ways to use this indicator tool in practical trading
When using the RSI indicator tool in trading, it is divided into 2 trading ways as below:
How to trade basic RSI
Based on the 2 overbought and oversold levels of RSI the analysis gives trading signals at these 2 oversold or overbought areas.
That’s when RSI crosses down to line 30 (oversold area). And if you cut it back up, enter a buy order right after the price goes above the previous UP candlestick, quite simple.
And vice versa when RSI exceeds line 70 (overbought area). And if you cut back down, enter a sell order right after the price crosses below the previous bearish candle, also extremely simple.
The image below is an illustrative example:
How to use RSI with divergence
The divergence method is used by many traders to predict signs of a product’s trend reversal.
There are two types of reversal: reversal from decrease to increase. And vice versa, reversing from increasing to decreasing, showing the divergence of these two price lines:
- For reversal from down to up:
+ The bottom of the price decreases, meaning the next bottom is lower than the previous bottom
+ The bottom of RSI increased, meaning the next bottom is higher than the previous bottom
- Conversely, for a reversal from bullish to bearish:
+ The peak of the price increases, meaning the next peak is higher than the previous peak
+ The peak of RSI decreases, meaning the next peak is lower than the previous peak
As shown below is an example illustrating an application of RSI divergence in trading:
An example of RSI divergence used in product trading is the EUR/USD forex pair.
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Some points need attention
After all, when using technical indicators, traders must accept a certain lag. And the RSI indicator is no exception.
When using the RSI indicator you should note the following points:
+ The RSI tool only has the meaning of technical forecasting, but does not guarantee reversal forecasting.
+ Every tool has a probability, and RSI is not perfect for 100% accurate forecasting.
+ When the price reaches the overbought zone > 70, it is not necessarily true that the price will reverse immediately and we must take profit on the buy order, and vice versa, when the price reaches the oversold zone < 30, it does not necessarily true that the price will reverse immediately and we will It is not right that we have to take profit from the sell order immediately.
+ If a reversal occurs, the reversal from RSI’s forecast may be a short-term reversal. Medium and long term depending on the time frame we trade. Depending on the time frame we trade, RSI will have different parameters. Therefore, you should not see RSI starting to be oversold > 70 and think that the market is about to have a reversal or vice versa, which is completely wrong.
In addition to the above, you can also learn more about CFD and factors affecting demand to make trading more convenient.
Epilogue
Finally, to use the tool RSI indicator effectively. You should combine it with other indicators to help us make decisions faster and more accurately. To avoid misunderstandings about this RSI indicator. Hope the above article about RSI from Learn Forex Trading is useful to you.
