So how can RSI assist us enter trades in a directional market ?
The RSI forex indicator has a standard adjust of 14 periods and this indicator oscillates by comparing the average losses versus average gains of an market price. This builds situations where market price is either determined oversold at a reading below 30 level , or overbought above 70 level. Price will drive RSI to these area on a move against the market trend and alert a point where Forex traders may look to rejoin long term momentum.
Sample picture above , in a bearish trending market like EURGBP, It's important to only focus on overbought area. As Relative strength index indicator Forex trades over 70 level as depicted below, Forex traders will start finding for market pice to retracement and make lower lows. It is important to know that execution should only come once the Relative Strength Index Indicator trades back under our overbought area 0f 70. This is called as a failure swing and can be traded as a signal to trigger short entries in the direction of the market trend.
On our 8hr time frame chart we can see there were exactly 3 entry trading signals using Relative Strength Index failure swings on the EURGBP, Over the last trading year. While this situation may not seem like many Foreign Exchange traders, we can see how Relative Strength Index Forex indicator is helpful in timing entries trending markets. Forex traders finding for more trading signals may optimize to trade a smaller period trading chart. And , we should always determine the trend. RSI Relative Strength Index indicator and overbought area should be reversed for selling chances in a bearish trend and oversold area used to long in a bullish trend.
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