How To Use The RSI Indicator Forex Trading

Do you trade the markets using indicators?

In this video we break down two of our favorite ways to use the RSI indicator in our trading.

Watch the video to find out more...

In this video, we're going to take a look at the RSI indicator and how you can use it in your trading.

 

So, there are two ways that I really like to use this indicator for. First of all, I'm just going to delete it off the chart, so I can show you how to apply the chart.

If we're going to insert indicators, go down into oscillators, you'll see a Relative Strength Index.

If we click on that, I have all this set up already. So, I use period 7, apply to the close, and then I've done my own style, through there.

When I click okay, I have the RSI Indicator, and I have the levels 70 and 30.

Now, what this typically means is, if the price usually goes above 70 or the RSI goes above 70, we call this an overbought situation, and what we typically look for is potential shorts off the back of that. If the market goes into or below the 30 levels, we call this oversold. Typically, we'd be looking for buys off the back of that.

But, there are two cool ways to use an RSI Indicator, and one of my favorite ways is using it on a weekly time frame, a really good tool to use.

If I spot a few areas where we say the market has come into the overbought condition or oversold condition, what happens next?

What I like to do on a weekly time frame is to look for areas of support and resistance, and then areas on the RSI. We can see down here, for instance, that the market goes into an oversold condition at supporting areas. It goes in quite early, but when we get to that support level, this is where we take notice of it on that weekly scale. Then, we can look at the potential trend in the back of that.

Now, we took two longs in this move, through here. You can see in the videos a while ago that we talked about USD/CAD hitting targets, and both of these rallied up into the previous structure lows, and the RSI was in that oversold condition where we'd be looking for buyers.

Now, if we look at this situation that we have now, the market is going into that oversold condition again. We're at key support, so we need to wait to see how the price reacts.

In yesterday's video on USD/CAD, we talked about the four-hour change in simplicity, and we're still waiting for that, but again I'll show you how the RSI could be something to watch for in that move as well.

Again, if we look at the highs, we can see the market goes into an overbought condition, we get a really nice bearish price action there, then the market trends down since that point. Again, we're going to oversold conditions. Look at what happens here at support – the market changes trend, and we see some upside. Again in that oversold condition, the market at support, and the market moves higher.

So, we can use this on a weekly scale quite accurately. So, when the price does hit those key supporting points, and we do see that the price at that RSI Indicator is going into oversold and overbought conditions on the weekly timeframe, they react really well, and that's why it’s one of my favorites ways of using the RSI indicator. It's also what alerted me to look at USD/CAD going into this week because we're at key support level, we're in that oversold condition.

Now, another cool way we can use it is by looking at divergence. And, we have a couple of examples in this window here.

Divergence is when the price is doing one thing and the RSI is doing another. So, if the price is making an uptrend higher highs, typically the RSI should follow that. So, what you would see on the RSI Indicator is the same. We can see here, for instance, that the market makes a higher high, and so does the RSI indicator with this move, here. Now again, divergence is when the price is doing one thing, and the RSI is doing the opposite. Typically, if we're looking at this and the market’s making higher highs, and if we go to another one and see that the RSI is making a lower highs, then this is what we call divergence in the markets. We would be looking to short off the back of that move, and there's a great example up in here of that in particular.

So if I grab the trendline tool, we can see these two peaks here on this higher high.

When the price approaches this resistance level, through here, 1.3340 is an area where we said that the market could reverse from this point. But, the market is trending. We're getting higher highs and higher lows, until this point here. 

So, the market makes a higher high but the RSI makes a lower high. This could be a sign that the bullish trend is about to reverse.

Then what do we see after that?

 A bearish trend. Again, very close to it. The market then trends downside, towards this key supporting level, we're getting lower lows and lower highs. Now, what happens at support is the fact that we're getting consecutive lower lows but we're getting higher lows on the RSI Indicator – showing us again that there's a divergence between the price and the indicator. Typically, we'd be looking for long opportunities from this low.

Coming back into this level of support, what do we have? Well, the price is making slightly lower lows, through here. Let me zoom in so you can see that a little bit better. You can see that the price is slightly making lower lows. How is the indicator faring? Well, it's making higher lows.

So again, that’s another reason we could be seeing USD/CAD bottoming out in this area and potentially forming a reversal setup.

That's how you can use the RSI in your trading.