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Use an RSI Indicator to Make Your Forex Trading More Profitable

Nov 9, 2007
When it comes to forex-based technical analysis, using the relative strength index (RSI) indicator or your chart can give you insight into potential trading opportunities.

First, let's talk about what the RSI is, how it is set up on your chart, and how it can be used to decide when to enter the market.

The RSI is an oscillator, meaning that it will be separate from price data but still on the same chart and it will go up and down (oscillate) in value from 0 to 100.

When it comes to setting up your RSI indicator on the chart, the most popular setting is a 14-day period, though it is possible to tweak this setting to fit your own strategy.

Keep in mind though, that the longer the period is on your RSI indicator, the less frequently it will give trading signals, though the signals that it does give can be considered more reliable.

If the period is much shorter (like 8 or 9 instead of 14), the oscillator will be much more volatile and can give false signals more frequently, so it is important to find a balance.

Now when it comes to actually reading the RSI for trading signals, there are two main methods of doing this. With the first one, the values 30 and 70 are of critical importance (remember the RSI always gives a value between 0-100).

Typically, the lows and highs of the RSI will be below 30 and above 70, so when the RSI reaches this level and stays there, you can be sure that when it changes direction and heads closer to 50 then you will see a trend or market reversal.

For example, you are using a 10-minute bar chart and 14-period RSI. You see that the RSI has crossed the 70 line, moved to around 80 for maybe 40 minutes, and is now climbing back down. This could be a good indication that the market prices will follow and this could be a good time to sell. Your indication to enter would be when the RSI crosses 70 and continues going down.

The other popular way to trade the RSI is to use the number 50 as a center line or deviation line. This means that when the RSI crosses the center line and continues to climb steadily, this could be an indication to buy.

Conversely, if the RSI crosses the center line and continues to decline steadily, this could be a good indication to sell.

One important thing to always remember when you are using the RSI indicator on your charts is that the main purpose of this oscillator is to convey the current strength of the market, and whether or not a trend is likely to continue or reverse. Happy Trading!
About the Author
My name is Marcus Masters, and I have created one of the largest collections of free forex ebooks and guides on the internet at TheForexSurfer.com/reports.
You can also learn about my own trading strategy that I have come to call Forex Surfing , and how to make money riding the 'waves' of the global economy.
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