How to use Relative Strength Index in Forex Trading? -

How to use Relative Strength Index in Forex Trading Look for a divergence...i.e. If the chart of the currency pair makes a higher high and the RSI diverges (ie makes a lower low instead) then you can expect the currency pair to eventually turn down and go in the direction of the RSI divergence( down in this case) A technical indicator developed by Welles Wilder to help investors gauge the current strength of a stock s price relative to its past performance. The usefulness of this indicator is based on the premise that the RSI will usually top out or bottom out before the actual market top or bottom, giving a signal that a reversal or at least a significant reaction in stock price is imminent. RSI readings above 70 indicate the shares are overbought and are likely to start falling. Readings below 30 indicate the shares are oversold and a rally can be expected. The time period specified determines the volatility of the RSI. For example, a 9-day time period will be more volatile than a 21-day time span. When using Investor charts to study RSI, you can select whatever time period works best for your investing strategy. The main purpose of the RSI is to measure the market’s strength and weakness. A high RSI, above 70, suggests an overbought or weakening bull market. Conversely, a low RSI, below 30, implies an oversold market or dying bear market. Additionally, the value of 50, can serve the same purpose as the zero line in other oscillators. The slowing down of a current trend or a trend reversal may be signaled by crossing above or below 50. Selling when the RSI is above 70 or buying when the RSI is below 30 can be an expensive trading system. A move to those levels is a signal that market conditions are ripe for a market top or bottom. It does not indicate a top or a bottom. A failure swing or divergence accompanies your best trading signals. While the RSI can be used as an overbought and oversold study, it works best when a failure swing occurs between the RSI and market prices. For example, the market makes new highs after a bull market setback, but he RSI fails to exceed its previous highs.