How to Interpret Relative Strength Index (RSI) and Other Forex Oscillators

Do you know that the best forex traders hone their trading skills through practice and discipline? Also, they carry out self-analysis to understand what fuels their trades, and they do not let greed and fear get in their way. 

To succeed in forex trading, you need to master these skills.

You need all the help you can.

The good news is that you can use oscillators to help you make the best trading decisions. Some of them are far from perfect, but they can give you a feel for the market.

Oscillators serve various purposes though they are created to offer you a vivid picture of the market and predict possible market moves. They are reasonably easy to interpret and construct.

Oscillators’ beauty is that you can use them irrespective of whether the price is moving sideways, down, or up. Some technical tools such as moving averages offer small or no value in a sideways market.

How to Interpret Oscillators

Typically, oscillators are built with upper and lower boundaries and show lines that waver ( oscillate) between these two boundaries. Preferably, troughs and peaks in the oscillator conform to tracks and rises in the financial market.

How to interpret inordinate Readings

Extreme low or high readings suggest oversold or overbought market conditions. Nonetheless, keep your eyes open because technical oscillators can remain at extreme readings for an extended period in a powerfully trending market.

Never sell a market only because its oscillator reading is either too high or low. Understand that a new trend could be setting in.

Dividing ( Divergence)

When the market goes high, then corrects, and then makes another higher high, while the oscillator makes a small high, updates, and then creates a lower high, you usually have a bearish divergence. The opposite is also very accurate.

If the market movement is low, correct, and then goes for a higher low, you usually have a bullish divergence. Usually, this is a highly advanced warning that the existing trend is wearing off and the end of the current trend is around the corner.

Crossing the midpoint line

What does it mean when the technical oscillator crosses the midpoint line? It means that the prices will shift to the crossing direction. If the oscillator line crosses through over the midpoint, it’s bullish.  And if it cuts a little bit down through the middle, it’s bearish. It’s straightforward to interpret.

There are many different types of oscillators. But we’ll focus more on the Relative Strength Indicator (RSI). It’ll also talk about what RSI is, its uses, and how you can trade with it.

But before we discuss the best settings and strategies for using the Relative strength indicator, let’s talk about the basics to help paint a clear picture for you. Let’s take a look at technical analysis.

Technical Analysis Explained

Technical analysis is a way of forecasting price movements and the upcoming market trends. You do technical analysis by scrutinizing past market action charts and then compare them with the existing ones.

Performing technical analysis helps you understand what is taking place in the financial market currently and what is likely to happen in the future. It considers instrument prices and develops charts from the information to use as the initial tool.

One key advantage of using technical analysis is that many knowledgeable analysts can follow several markets and market instruments concurrently.

Relative Strength Index

The relative strength index is a movement indicator traders use in technical analysis. It measures the price change magnitude to evaluate oversold or overbought market conditions in asset or stock price.

The relative strength index is often shown as an oscillator ( a simple line graph moving between two well-known extremes), and its reading is from zero to a hundred. J. Welles Wilder Junior developed the indicator.

Conventional  RSI usage and interpretation is that values of seventy or more show that security is already overvalued or overbought and can be primed for a corrective pullback in price or a trend reversal.

A thirty RSI reading or below shows that the market is undervalued or oversold.

Top Relative Strength Indicator for Day Trading

Many traders find using the RSI indicator for trading during the day very helpful. The  14 periods as the default setting is appropriate for some traders, particularly swing traders.

But many day traders use a different setting when using RSI. These traders dislike the 14-period default setting as they claim that it can generate periodic trading signals. So, they reduce their time frame, though others raise the RSI period to enhance the oscillator’s sensitivity.

Other forex traders solve the issue by reducing their time frame. 

In a nutshell, short term intraday traders usually use lower RSI  settings with periods running from nine to eleven.

Short-term intraday traders (day trading) often use lower settings with periods in the range of 9-11.

Longer twerk position traders usually set the RSI period to range between 20- 30.

Medium-term swing traders regularly use 14-period settings.

Your trading strategy determines which RSI settings to use.

Final Thoughts

Before starting your forex trading journey, know what you want and how to achieve it. Let your goals be crystal clear, then make sure that your trading strategy can help you attain those goals.

Every trading style has various risks that need you to have an individual approach and attitude to trade successfully.

Leave a Reply

Your email address will not be published.