Best RSI trading strategy, ultimate guide
The Relative Strength Index, or better known as the RSI, is a technical indicator that is widely used by traders in conducting financial market analysis.
This indicator is very famous because it is one of the default MT4 indicators.
How to use the RSI indicator buy and sell signals mt4, this guide will reveal in as much detail as possible what you are looking for.
What is RSI indicator?
The Relative Strength Index (RSI) has a similar function to the Stochastic indicator, it is a momentum indicator to analyze price changes and evaluate overbought or oversold conditions on the price of any pair or other asset.
The RSI uses an oscillator line shown on a reading scale from 0 to 100.
The developer of the RSI indicator is J. Welles Wilder Jr. popularized in his 1978 book, "New Concepts in the Technical Trading System."
The traditional way to read RSI is if the price is above the value of 70 an indication that the pair or asset has entered overbought or overvalued. Conversely, if the RSI is below the 30 levels, it indicates oversold or undervalued conditions. When the RSI is in this zone it will likely be a trend reversal.
The RSI Indicator Period used as a standard by Wilder is 14. However, the period can be changed to be a smaller or bigger period. You can adjust according to the level of needs of each trader. Most traders only use RSI like other Oscillator indicators: only looking for Overbought and Oversold signals. But apparently, the RSI Indicator can be used for more than that.
How to Calculate RSI indicator?
In calculating the RSI indicator value, there are several components that must be calculated first. These components are RS, average gain, and average loss. If you use a standard period from Wilder, RSI indicator formula to calculate it is:
RS = Average gain/loss
Average gain = (previous increase average x 13) + last increase) / 14
Average loss = (previous decline average x 13) + last decline) / 14
The average gain or loss is the difference in the closing price of the market. For example, suppose the price of 1 hour ago is closed at level 2, while the current price is at level 5, then there is an increase of 3 points.Change will be calculated for 14 candles on each time frame. Furthermore, the RS value will be used to calculate the RSI indicator value.
The following formula is used:
RSI = 100 - (100 / (1 + RS)
How RSI works?
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 direction of the trend by observing divergence towards price movements. Apart from using it for general RSI functions, there are other tips from traders who might be able to help in using this indicator.
RSI has scale from 0 to 100. RSI used to help you to forecasting overbought and oversold zone. The market is considered overbought if the RSI is below 30 and is considered overbought if the RSI is above 70.
How to use RSI?
All trading assets have a saturation point, where the price is considered overvalued or undervalued.
Or in other words, when the trend goes up, the price is considered too high which is called overbought, and or the price is considered too low or oversold.
In determining the overbought and oversold levels, a certain level is usually determined from an indicator that can represent its saturation.
Market overbought and oversold can be measured using the RSI indicator. Generally, levels 70 and 30 are used as limits, which means that if the RSI indicator value is above 70, the price is Overbought. Whereas if the RSI indicator value is below 30, the price is Oversold. Some people also often use level 80 and 20 as standards, so this reference is not standard
The image above as example, the two conditions, in general, have been described, namely Overbought on the RSI indicator value above 70, and Oversold when the RSI indicator value is below 30.
It should be noted that not always Overbought and Oversold conditions will lead to a long reversal as exemplified. More often, prices will continue to go up and down because the trend is still strong. In order not to get caught in false signals, it is recommended to combine RSI with other technical indicators.
Traders often use the RSI indicator as an aid in making trading decisions. One example that is often used is a combination of Bollinger Bands and RSI.
Besides seeing the level of market saturation, traders also often use the RSI indicator to analyze when the trend will change. The beginning of this change can be detected by seeing breakot at certain levels in the market.
In looking or determining trends, traders usually use the Moving Average or Channel. However, not only these two technical indicators can be used as references. RSI has its own way of determining trends. In determining trends through the RSI, level 50 is needed as a centerline. If the RSI signal is above 50 then maret is uptrend, while if it is below 50 then market is downtrend.
Besides determining trends, level 50 can also be an early sign of a trend change. This can be marked by breaking level 50. This crossing is also commonly known as The Centerline Crossover, or a midline break with the RSI signal.
RSI Indicator For Divergence strategy
Just like the Stochastics and MACD indicators, RSI can also be used to looking divergence that occurs on the market. Based to Wilder, signal divergence can be a reversal point in a trend. This is possible because the price does not have the strength to continue the journey.
A bullish divergence signal occurs when the price on the chart appears to form a lower low, but the RSI signal forms a higher low. The bearish divergencel occurs if the price on the chart formed to form a higher high, but the RSI signal actually forms a lower high.
Take a look image belowFor more details, refer to the following example:
RSI bullish divergence
RSI bearish divergence
Using the RSI Indicator with Support Resistance
Apart from the above methods, the RSI can also be used like trading with a naked chart. So, trading only uses the RSI indicator and the Support Resistance line only. Resistance lines can be formed with several results points from the experiment failing prices for. For the support line, it can be formed with a number of points resulting from failed attempts to fall.
After the Support and Resistance lines are formed, what needs to be considered is when the price approaches this level once again. It should be observed carefully, whether the price will break out at that level or rejection will occur. Break out means the price will continue its journey, while rejection means the price will reverse.
Special Case: Failure Swing
This method of use is specifically classified by Wilder because even though the appearance rate is rare, the accuracy is very high. Failure Swing is a condition that is almost the same as divergence, namely the inability of prices in continuing the trend journey. It's just that in this condition, Wilder requires to pay attention to the RSI value only.
The Failure Swing Bullish occurs with the following conditions:
The RSI moves down 30 so that Oversold occurs.
Prices move quickly to retest until the RSI bounces up from levels below 30.
RSI will try again to break level 30, but failed.
The RSI will move up through the highest level number 2.
Bearish Failure Swing occurs with the following conditions:
The RSI moves above level 70 so that it is Overbought.
Prices move quickly to retest until the RSI bounces down from level 70
RSI will try again to break level 70, but failed.
The RSI will move down through the lowest level number 2
However, in practice, traders will often find that:
The indicator does not come out from below level 30 or vice versa does not go down from level 70, even though it has been for days. This is a "trending" market situation. If you are not ready to deal with it, then you can get stuck floating negatively for a long time and end up exposed to the Margin Call.
The indicator does not go above level 70 or falls below level 30, even though it has been for days too. This is usually related to the "sideways" market situation and low volatility. If you are not ready to deal with it, then you will not be able to open trading positions because there is no signal.
Steps to Optimize the RSI Indicator
In order not to get caught up in the myth of the inaccuracy of the RSI indicator due to the two cases above, you can try applying the following steps:
Slide the oversold threshold and overbought RSI to levels 20 and 80. On the Metatrader platform, an option like this will appear to customize the RSI indicator. Choose 20 and 80 so that the level is automatically marked by the platform. This step allows traders to sort oversold and overbought signals more accurately, rather than staying on level 30-70.
For buy or sell trading signals, pay attention to the level 50 midline. If the RSI indicator rises above 50, it means it's time to find a moment to buy. Whereas if the RSI is below the level of 50, it means it's time to sell. Preferably, don't use oversold and overbought levels as a marker for buy or sell; but as a marker of time to close a trading position.
Change the period parameters on the RSI indicator according to your trading period. By default, the RSI indicator has a period 14 setting. However, short-term timeframe traders (H4 or lower) should use smaller periods, for example, 9. Whereas long-term traders should use a higher period, for example, 25. This parameter can also be modified easily on the Metatrader platform. Try setting the RSI indicator this way, then practice it.
Best RSI settings for swing trading
The RSI indicator can also be used in swing trading strategies, traders can take advantage of the RSI signal in combination with SMA 20 which is used to determine trends.
RSI settings for swing trading can use period 5. This may be considered quite extreme because the signals that appear will be more frequent than the standard period.
Here the concern is SMA 20 as trend confirmation, if the price is above SMA 20 it indicates an uptrend, and traders are waiting for RSI to enter the oversold zone before open Long.
Conversely, if the price is below SMA 20, it means that the market tends to be downtrend, and traders are waiting for RSI to enter the overbought zone before open Short. Very simple, but it's a unique swing trading strategy.
Best RSI settings for 4-hour chart
The 4-hour chart is an ideal timeframe for intraday trading, RSI is also suitable for intraday trading strategies by adjusting the settings used. The best setting for the 4-hour chart is with 30 periods,
With this setting, there are less frequent signals showing overbought and oversold zones, but this is one of its features, it can reduce false signal noise.
Remember forex trading is not about trade quantity, it is about trade quality.
You get a lot of signals but if most of them are false signals then you have been trapped by a tool that you trust yourself.
RSI settings for 1 minute chart
The RSI indicator can also be used on minor timeframes for scalping strategies. The RSI setting on this minor timeframe has also been used by American traders, using period 2. However, in the trading rules of scalping the RSI 1 minute chart, it looks for oversold levels above 99 levels and overbought levels below 1 levels.
Because it uses a minor timeframe, the trading rules should not be violated because it will reduce the effectiveness of the signal.
This may require more focus, to reduce the burden on traders by manual 1-minute chart, using a trading algorithm will be much better.
The method of trading this minor timeframe scalping is to open buy waiting for RSI to reach level 99 and to open Sell waiting for RSI to reach level 1.
While scalping targets with a 1-minute chart are reasonable in the range of 5-10 pips. Stop-loss adjusts to the risk-reward ratio of the trader itself.
What the best RSI indicator?
Of all the RSI settings in different timeframes, which of the three is the best?
Each strategy has its own advantages and disadvantages, it all depends on the trader's own factors.
Maybe you've heard a quote, that "the biggest enemy is the trader himself, and the market is never wrong."
This psychological factor plays a high role, especially the trader's manual.
Swing trading can provide profit by using the RSI in the settings previously mentioned.
1 minute chart for scalping can also be profitable. In a trading contest, the winner of the scalping style contest, he is an aggressive trader.
Even with a 1 minute chart, if the trader can focus it is possible to earn a large accumulated profit.
Intraday trading with 4 hour timeframe for RSI. All traders agree that intraday traders also make trading comfortable, this is not rushed by time because after creating a trading plan he can relax waiting for all plans to be completed.
If the day has reached the trade not reaching the target, the trader will close manually.
The Relative Strenth Index or RSI is one of the popular toolboxes.
This momentum indicator can work on all trading assets and can be used on all timeframes.
This indicator can provide buy and sell signals in trading.
Traders will look at the RSI level as a reference in overbought and oversold analysis to get trading signals.This indicator can be used alone, but by some traders they try to modify it in combination using other toolboxes. Some trader they also use 3 RSI with settings that have been adjusted for each indicator.