Using Relative Strength Index(RSI) to trade the financial market

Using Relative Strength Index(RSI) to trade the financial market


RSI is an oscillator indicator which was created by J.Welles Wilder. Being an oscillator indicator, RSI ranges between 0 to 100.Since RSI is an oscillator indicator, it is therefore based on overbought and oversold of the market as well as divergence. By RSI being divergence, it means that when the RSI is moving downwards while the market is moving upwards, the RSI will reverse and start moving upwards in the same direction as the market. On the other hand, oversold of the is a situation in the market where there is excess of sells thus causing the market not to be able to accommodate any more sells position thus resulting to a buy reversal market while overbought of the market is a situation in the market where there is excess of buys thus causing the market not to be able to accomodate any more buy position thus resulting to a sell reversal market.   Since RSI ranges between 0 to 100 , it therefore follows that the buy and sell signals will occur when RSI rises above 70 or it falls below 30.   Therefore, based on divergence we can interpret the market as follows;   When the market is in an upward trend while the RSI is moving downwards, the RSI will reverse and start moving upwards in the same direction as the market thus signaling the trader to close a sell position and open a buy position. This is indicated as from the candlesticks chart below;

 

  rsi.png  

 

From the candlesticks chart above, at point A which is along the RSI, the RSI was moving downwards while the market was moving upwards. The RSI then reverse and start moving upwards in the same direction as the market. This is indicated by the long arrow along the RSI.   Based on oversold and overbought we can interpret the market as follows;  

                                          OVERSOLD market

For oversold market, the RSI will fall below 30. This will signal the trader to close any sell position and open a buy position since the market start an upward trend. This is indicated as from the candle stickschart below;

  OVERSOLD.png  

From the candlesticks chart above there is point A which represents the RSI and point B which represents the oversold condition market. At point B the RSI has fallen below 30 thus an indication of an oversold market condition. This will signals the trader to close any sell position and open a buy position since the market is starting to move upwards.          

                               OVERBOUGHT MARKET

For overbought market, the RSI will rise above 70. This will signal the trader to close any buy position and open a sell position since the market will start moving downwards. This is indicated from the candle sticks chart below;

  OVERBOUGHT.png  

From the candle sticks chart above, there is point A which represents the RSI and point B which represents the overbought market condition. At point B , the RSI has risen above 70 thus an indication of an overbought market condition.This will signals the trader to close any buy position and open a sell position since the market is starting to move downwards.  

RecommendationIf you are a day trader just use 1 min, 5 min and 30 min timeframe while if you are a swing trader just use 1 hour and above timeframe if you want RSI indicator to work well for you     

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quintomudigo
quintomudigo

Trader, Blockchain Technologist and Contentpreneur. Also founder and CEO @ Teacher Forex School.


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