The Relative Strength Index (RSI) is one of the most popular oscillator indicators and is considered quite reliable. Since its creation by Welles Wilder in 1978, the RSI indicator is used in trading in all types of markets, including by forex traders. However, there are actually certain tricks in using the RSI that can affect the accuracy of trading results, but not many people know.
Traditionally, the RSI indicator is used to determine the right time of entry by looking at overbought and oversold levels , and detecting possible changes in trend direction by observing divergences against price movements. In addition to the usual functions of the RSI, here are three tips from robot trade that might be helpful in using this indicator.
Tip 1: In a strong trend, ignore the overbought and oversold RSI indicator.
When prices are trending strongly on a relatively long timeframe, the entry method by relying on overbought and oversold RSI indicators is no longer accurate.
This indicator is created by comparing the number of positive (higher) price changes with negative (lower) price changes for a certain period. The ratio is plotted in the range 0 to +100. If after that time period the price movement has not changed (such as when it is trending strongly), then the RSI will remain in an overbought condition (when an uptrend condition ) or oversold (when a downtrend condition ).
In the GBP/USD example above, the downtrend is strong and the RSI remains in the oversold area for a long period of time. In this case, if you buy when it is oversold, it will cause a loss.
The solution, before observing the RSI indicator, traders must look at the trend indicator first. Trend strength indicators that are often used are MACD, Bollinger Bands and ADX.
Tip 2: Pay attention to level 50 on the RSI indicator ( center line ).
All indicators of the oscillator type have a middle level or center line , usually at the level of 50, or 50%. Likewise for the RSI indicator. This often overlooked center line shows the momentum of changing the direction of price movements when there is a retracement , or even when there is a change in trend direction.
What is the function of the center line on the RSI indicator?
When the RSI breaks through the center line upwards, it signals a buy signal . And conversely, when it penetrates the center line downwards, it signals a sell signal . Examples are as follows:
In the GBP/USD chart example above, it appears that the center line functions as a support level. When the RSI indicator breaks for the second time, the price switches to a downtrend .
Tip 3: The use of the RSI indicator parameters needs to be adjusted to the trading time frame.
Usually, the default time period parameter on the trading platform for almost all oscillator type indicators is 14, including the RSI. Based on experience, 14 periods are suitable for the Daily time frame, but less accurate for lower trading time frames .
The maker of the RSI indicator, Welles Wilder, also recommends using the 14 period on the Daily time frame. According to Wilder, the smaller the measurement time period, the more sensitive it will be, making observations difficult; while the larger the time period, the less sensitive it will be, thus affecting the measurement accuracy.
So, if you are going to use the RSI indicator at a time frame that is lower or higher than the Daily, you should not use the default parameter . If so, how is it adjusted?
Basically, the smaller the setting period, the more frequent trading signals will be generated. Day traders with a time frame of 1 hour and below usually use the 9 period RSI, while Scalpers use 7 periods. While medium and long term traders use 14 or 25 periods.
In addition to the addition of these three tips, there are also alternative ways to use the RSI indicator in combination with other technical indicators. One of them is combin