Author: Nikolay Kositsin
Indicators: Relative Strength Index (RSI)
newdigital, 2013.08.07 12:55
Relative Strength Index or RSI is the
most popular indicator used in Forex trading. It is an oscillator
indicator which oscillates between 0 -100. The RSI is a trend following
indicator. It indicates the strength of the trend, values above 50 indicate a bullish trend while values below 50 indicate bearish Forex trend.
The RSI measures momentum of a currency.
The centerline for the RSI is 50,crossover of the centerline indicate shifts from bullish to bearish and vice versa.
Above 50, the buyers have greater momentum than the
sellers and price of a currency will keep going up as long as RSI stays
Below 50, the sellers have greater momentum than the
buyers and price of a currency will keep going downwards as long as RSI
stays below 50.
In the example above, when the RSI is below 50, the
price kept moving in a downward trend. The price continues to move down
as long as RSI was below 50. When the RSI moved above 50 it showed that
the momentum had changed from sell to buy and that the downtrend had
When the RSI moved to above 50 the price started to
move upwards and the trend changed from bearish to bullish. The price
continued to move upwards and the RSI remained above 50 afterwards.
From the example above, when the trend was bullish
sometimes the RSI would turn downwards but it would not go below 50,
this shows that these temporary moves are just retracements because
during all these time the price trend was generally upwards. As long as
RSI does not move to below 50 the trend remains intact. This is the
reason the 50 mark is used to demarcate the signal between bullish and
The RSI uses 14 day period as the default RSI period,
this is the period recommended by J Welles Wilders when he introduced
the RSI. Other common periods used by forex trader is the 9 and 25 day
The RSI period used depends on the time frame you are
using, if you are using day time frame the RSI 14 will represent 14
days, while if you use 1 hour the RSI 14 will represent 14 hours. For
our example we shall use 14 day moving average, but for your trading
you can substitute the day period with the time frame you are trading.
Center-line: The center-line for RSI
is 50. A value above 50 implies that a currency is in a bullish phase
as average gains are greater than average losses. Values below 50
indicate a bearish phase.
newdigital, 2013.08.07 13:03
RSI values of above 70 are considered to be
overbought; traders consider points above the 70 level as market tops
and good points for taking profits.
RSI values of below 30 are considered to be oversold;
traders consider points below the 30 level as market bottoms and good
points for taking profits.
These levels should be confirmed by center line
crossovers. If these regions give a market top or bottom, this signal
should be confirmed with a center line crossover. This is because these
levels are prone to giving whipsaws in the market.
In the example below, when the RSI hit 70, it showed
that the currency was overbought, and this could be considered a signal
that the currency could reverse.
The currency then reversed after a short while and
started to move downwards, until it got to the oversold levels. This was
considered a market bottom after which the currency started to move
When the market is trending strongly upwards or
downwards the RSI will stay at these levels for a long time. When this
happens these regions cannot be used market tops and bottoms because
the RSI will stay at these levels for an extended period of time. This
is the reason why we say that RSI overbought and oversold regions are
prone to whipsaws and it is best to confirm the signals using
newdigital, 2013.08.07 13:15
RSI Indicator Divergence Trading Setups
Divergence is one of the trade setups used by Forex
traders. It involves looking at a chart and one more indicator. For our
example we shall use the RSI indicator.
To spot this setup find two chart points at which
price makes a new swing high or a new swing low but the RSI indicator
does not, indicating a divergence between price and momentum.
In the chart below we identify two chart points, point A and point B (swing highs)
Then using RSI indicator we check the highs made by the RSI, these are the highs that are directly below Chart points A and B.
We then draw one line on the chart and another line on the RSI indicator.
How to spot divergence
In order to spot divergence we look for the following:
First let us look at the illustrations of these terms
There are two types of divergence:
newdigital, 2013.08.07 13:34
RSI Classic Bullish and Bearish Divergence Trading Setups
Classic divergence is used as a possible sign for a
trend reversal. Classic divergence is used when looking for an area
where price could reverse and start going in the opposite direction. For
this reason classic divergence is used as a low risk entry method and
also as an accurate way of exit out of a trade.
There are two types:
Classic Bullish Divergence
Classic bullish divergence occurs when price is making lower lows (LL), but the oscillator is making higher lows (HL).
Classic bullish divergence warns of a possible change
in the trend from down to up. This is because even though the price
went lower the volume of sellers that pushed the price lower was less
as illustrated by the RSI indicator. This indicates underlying weakness
of the downward trend.
Classic bearish divergence
Classic bearish divergence occurs when price is making a higher high (HH), but the oscillator is lower high (LH).Classic bearish divergence warns of a possible change in the trend from
up to down. This is because even though the price went higher the
volume of buyers that pushed the price higher was less as illustrated
by the RSI indicator. This indicates underlying weakness of the upward
newdigital, 2013.08.07 14:41
RSI Hidden Bullish and Bearish Divergence Trading Setups
Hidden divergence is used as a possible sign for a
trend continuation. Hidden divergence occurs when price retraces to
retest a previous high or low.
Hidden RSI Bullish Divergence
Forms when price is making a higher low (HL), but the oscillator is showing a lower low (LL).
Hidden bullish divergence occurs when there is a retracement in an uptrend.
This setup confirms that a retracement move is complete. This divergence indicates underlying strength of an uptrend.
Hidden RSI Bearish Divergence
Forms when price is making a lower high (LH), but the oscillator is showing a higher high (HH).
Hidden bearish divergence occurs when there is a retracement in a downtrend.
This setup confirms that a retracement move is complete. This divergence indicates underlying strength of a downtrend.
newdigital, 2013.08.07 14:49
RSI Swing Failure Forex Trading Setup
RSI swing failure can be a very accurate method for
trading short term currency moves. It can also be used for trading long
term trends but it is best suited for short term trading especially for
those traders that trade reversals.
The RSI failure swing is a confirmation of a pending
market reversal. This setups a leading breakout signal, it warn that a
support or resistance level in the market is going to be penetrated.
This setup should occur at values above 70 for an upward trend and
values below 30 in a downward trend.
RSI Failure Swing
in an upward trend
If the RSI hits 79 then pulls back to 72, then rises
to 76 and finally drops to below 72 this is considered a failure swing.
Since the 72 level is an RSI support level and it has been penetrated
it means that price will and follow and it will penetrate its support
In the example below, the RSI hits 73 then pulls back
to 56, this is a support level. The RSI then rises to 68 and then
drops to below 56, thus breaking the support level. The price then
follows afterwards breaking it support level. The RSI swing failure is a
leading signal and it is confirmed when price also breaks it support
level. Some forex traders open trades once the swing failure is complete
while others wait for price confirmation, either way it is for a
trader to decide what work best for them.
RSI Failure Swing in a downward trend
If the RSI hits 20 then pulls back to 28, then falls
to 24 and finally penetrates above 28, this is considered a failure
swing. Since the 28 level is an RSI resistance level and it has been
penetrated it means that price will and follow and it will penetrate its
newdigital, 2013.08.07 14:59
RSI Indicator Chart Patterns and Trend Lines
Traders can plot trend lines on the RSI in the same
way as you can plot trend lines on the price charts. RSI trend lines are
plotted the same way trend-lines are plotted on the chart; by joining
consecutive highs of the RSI Indicator or consecutive lows on the RSI
RSI Chart Patterns
Chart patterns such as head and shoulders or triangle chart patterns that are not evident on the price chart are often formed on the RSI indicator.
RSI indicator also often forms chart patterns such as
head and shoulders or triangles patterns that may or may not be
visible on the price chart. As shown on the chart below the Reverse Head
and Shoulders reversal formation is clearly shown on the RSI indicator.
RSI Support and Resistance Levels
Sometimes levels of support and resistance are demonstrated better on the RSI than on the price chart.
In an uptrend the support levels
should not be broken at any one time, if they are broken then price
will also break the support levels and the upward trend is going to
In a downtrend the resistance
levels should not be broken, if they are broken then price will also
break the resistance levels, and the downward is going to reverse.
In the example above when the third resistance level was broken the downtrend reversed to an upward trend and when the sixth support was broken the uptrend reversed and broke the upward trend line.
newdigital, 2013.08.07 15:29
RSI Indicator Forex Trading Strategy Summary
The RSI indicator is one of the most widely and
commonly used indicators available. RSI indicator is a momentum
oscillator with some trend following characteristics.
RSI is one of the most popular indicators used in
technical analysis. RSI is used to generate Forex trading signals using
RSI indicator plots the divergence and convergence of
moving averages. The RSI is constructed using moving average analysis.
Moving Average Convergence/Divergence is a trend-following indicator.
It indicates the correlation between two moving averages.
The indicator is not displaying on my chart and there are no errors showing in the source code?
Any help would be greatly appreciated?
P.S It can be accessed from the indicator menu but just does not display the graph
Do you get any message in Experts or Journal tab when you place the indicator in the chart ?
You probably have to choose a lower timeframe for your chart.