RSI or Relative Strength Index is a technical analysis tool that has almost the same uses as the stochastic indicator which shows whether the market conditions are overbought or oversold . And it has a scale of 1-100 with the condition that the reading when the line is above the 70th scale is said to be the market in overbought condition and when it is below the 30th scale the market is said to be oversold .
How to trade using RSI
We can use RSI like using Stochastic which is determining the potential position above (top) or below (bottom) a price depending on the market conditions whether it is overbought or oversold .And this certainly helps us to be able to maximize profits 🙂
Following below is an example of an EUR / USD oversold chart with a 4-hour timeframe.
EUR / USD has experienced a downtrend of several weeks which is down around 400 pips for 2 weeks. On June 7, it traded below 1.2000. And the RSI shows the line has been below the 30 scale which indicates that the number of seller traders has started to leave its position below so that the price decline will end soon. A few moments later the price leaves the bottom position heading up to form an uptrend pattern for several weeks.
How to Determine Trend Using RSI
RSI can be used to determine a price movement trend whether it is an uptrend or a downtrendafter confirmation is made, whether it is above or below the 50 scale.
If you believe that an uptrend will be formed, first make sure that the RSI line is above the 50th scale and if you believe that the downtrend will be formed, first make sure that the RSI line is below the 50th scale.
For example, as in the graph above before we believe that the downtrend pattern is starting to form, we need to wait for confirmation in the form of an RSI line that can break below the 50 scale. And we need to do this to avoid the term fakeout or false signal will make us take the wrong position which ultimately makes us lose.
You can combine RSI with other indicators such as MACD , Stochastic , Bollinger Band , or ADX to get the right prediction results 🙂