Leveraging The Benefits Of The Relative Strength Index (RSI) In Forex Trading

Leveraging the benefits of the Relative Strength Index (RSI) in forex trading is easy when you know how to go about it. All it takes is a keen eye and in-depth understanding of how this particular indicator works. It may also require the utilization and analysis of other key indicators for surety. In this article, you will get to learn everything about the RSI – what it is, how it is used, and its complementary indicators.

What is the Relative Strength Index?

The RSI is one of the common indicators popular among forex traders. Like other indicators, it is designed to aid with analysis and help traders place accurate trades. In some ways, the RSI functions in a similar manner to the stochastic indicator in that it identifies oversold and overbought currencies – it helps to identify tops and bottoms.

The RSI is scaled from 0 to 100, and the key readings are divided into four main categories. Two of these categories have to do with oversold and overbought market conditions – readings below 30 indicate oversold conditions while readings above 70 indicate overbought conditions. The third and fourth categories split the range in half – readings above 50 indicate that there is a possible uptrend while readings below 50 indicate otherwise.

Using the RSI in Forex Trading

It becomes easier to analyze the RSI with the aforementioned categories in mind. The following is a look at what each of these categories does, and how you should apply them in the market:

  • Below 30 – Oversold
  • Above 70 – Overbought
  • Below 50 – Possible Downtrend
  • Above 50 – Possible Uptrend

Consider a EUR/USD trade. Taking the normal fluctuations into consideration, should the RSI drop to below 30 then it is an indication that the pair has been oversold and it is highly likely that there are very few sellers left to fuel the current downtrend. In this case, this is an indication that the current downtrend may be over, and the ideal response is to bank on an uptrend as the price will likely reverse.

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