Indicators

Optimize Your Forex trading with the RSI

The RSI is an overbought/oversold indicator. Among the different indicators in technical analysis, Relative Strength Index (RSI) is the easiest to interpret. Developed by J. Welles Wilder, the world first knew about this powerful analytical tool in 1978 through an article in commodities magazine (now Future Magazine). Then, RSI was introduced in Wilder's book, New Concepts in Technical Analysis that was published in the same year. RSI is based on the statistical phenomena of "regression to the mean". The basic application of these phenomena assumes that within a statistical sample, a random variable should have a value closer to its mean value. Applying this to the foreign exchange market will imply that the price of a currency pair shouldn't rise or fall dramatically over a short period of time; and if this happens, the market is said to be in an overbought or oversold status.

Setting the Parameters of the RSI
Although traders can customize the input periods of the RSI, 14 is the most frequent one. This is what Wilder has recommended in his book as a default period and this is what the majority of traders are using today.

Suggested Strategy:

1)	Traders need to identify a range bound market (higher lows and lower highs).
2)	When the RSI moves above 70, traders may place a short position after the RSI moves back below 70 or after formation of a bearish candlestick pattern.
3)	When the RSI moves below 30, traders may place a long position after the RSI moves back above 30 or after the formation of a bullish candlestick pattern.