This information has been prepared by IG, a trading name of IG Markets Limited. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information.

For instance, RSI reacts too quickly during sudden sharp price movements. On the other hand, BBs may trigger a series of stop-outs and result in losses piling up when the price ‘walks the band,’ which it often does. In this example, we can see the RSI aligns with the price action, giving you buy and sell signals. A typical chart where the price goes “sideways” or simply ranges. This is the perfect moment to interpret RSI overbought and oversold signals as buy and sell signals. Reading the RSI requires some practice, and we hope that this article will guide you.

How RSI Can Identify Oversold Conditions

Many professionals favor stochastic oscillators because of their signal accuracy and versatile applications. The reversal in the overbought market zone and crossing the level from above is a signal to enter a short position. The reversal in the RSI oversold zone and crossing level 30 from below signals a long entry. In the above figure, red lines indicate that the bearish divergence occurs which is based on the highs. Green lines mark Cardwell’s positive reversal levels.

Whatever your trading strategy, remember to adopt risk management techniques as markets can be unpredictable at times. Using stop loss and take profit orders helps limit losses and securing profits in case the market suddenly moves in a direction opposite to your speculation. Traders often combine technical indicators to verify the signals and make smarter decisions. This not only gives them more confidence in their predictions, but also strengthens their strategy. This guide explains how to combine Bollinger Bands and Relative Strength Index, two of the most popular indicators to strengthen your trading strategy.

The Essential Guide To RSI Indicator

One of the Price Action patterns is a Failure Swing. It is based on the false breakout of a significant what is the forex grid trading strategy High or Low of the previous swing. Everything is more straightforward in the LiteFinance terminal.

That means we’ll look for the past 5 major swing highs and past 5 major swing lows. This means that you’ll need a swing high/low of at least 50 pips within 30 bars to be considered a valid swing high/low for the indicator. Shows the hidden RSI area range where the hidden RSI swing low support is. Shows the hidden RSI area range for this hidden RSI swing high resistance. In the above example, we can see that out of 5 of the price reversals, 4 of them bounced nicely off the 32-36% level on RSI. You could try 8 out of 10, but those conditions can be a bit too strict and might reduce the number of times you can find such setups.

RSI works like a Stochastic oscillator, Moving Average Convergence Divergence , and CCI. There also used the modifications, such as Silent RSI, RSI Divergence, and others. RSI isn’t a great tool for confirming or executing trades. Most forex traders find RSI most valuable as a preliminary indicator that identifies trade opportunities and prompts further research and evaluation.

I have prepared the relative strength Calculator template for technical analysis. The Excel file includes an algorithm for calculating the Relative Strength Index, you can also draw diagrams using the RSI indicator values you enter. This is one of the most common calculation formulas, but not the only one. For example, in adapted versions of the RSI indicator formula, the market recent price change is smoothed using Exponential Moving Averages.

• But if it doesn’t rebound, risks of the further fall would increase.
• The shorter is the timeframe, the less is the period.
• These include white papers, government data, original reporting, and interviews with industry experts.
• If the price is making higher highs, and the indicator is making lower highs, a negative or bearish divergence signal is considered.
• So if you used a lower RSI period settings, the more sensitive the indicator will be to recent price movements (and it’s just the opposite for higher RSI period settings).

Bollinger Bands are plotted using a reference line, which may be a simple moving average line or exponential moving average over N periods. This means when the RSI indicator is “oversold”, it presents buying opportunities in the stock market since the trend is likely to continue higher. At the same time, you know the stock market is in a long-term uptrend and most pullbacks would lead to a resumption of the trend. However, just because the stock market is in a long-term uptrend doesn’t mean it goes up every day.

When the price hits a ‘higher high’ but the RSI makes a ‘lower high’ – this is known as bearish divergence. I recommend trying to trade with a reliable broker here. The system allows you to trade by yourself or copy successful traders from all across the globe. When level 50 is reached, you close half of the position. The rest of the position is protected by the stop at the breakeven and is closed when the oscillator reaches the opposite signal level .