The RSI (Relative Strength Index) is used to show you when a Forex currency pair is in an overbought or oversold position. And this, in turn, means that the upward or downward trend fizzles, and that may soon happen a trend reversal. RSI is a great first mate, which tells you when the market is going to turn around.
How to use RSI in Forex trading?
RSI is an oscillator, that is, its value always fluctuates between 0 and 100. The value of around 100 (typically 80 or above) indicates that the market has gone too far, and you have to look for confirmation of a trend reversal. In contrast, a value of 20 or below means that the market is too decreased, and should start to grow soon.
The problem with RSI lies in the fact that the majority of people trying to catch a trend reversal time. Experienced traders describe it as an attempt to catch a falling knife. You might eventually catch him, but at the same time to receive cuts, bruising and bleeding.
The secret to using the Relative Strength Index is not to identify a change in trend. Instead, you should try to determine the trend itself to continue to trade in its direction.
What does it mean? As a rule during each strong trend, the market moves back before continuing on its way. For example, the price rose from 1.2000 to 1.2500 over the past week, but during this time a currency pair rolled by 50-75 pips a couple of times before continuing the upward movement.
Use the RSI on such kickbacks to determine a good time to buy a Forex currency in anticipation of the continuation of the trend. This ensures that you will still trade with the main trend, providing a favorable balance of risk and reward.