Indicators are an excellent way of enhancing your trading strategy. To remind you, in our series of educational articles posted under the SimpleFX CFD Academy we understand trading strategy as a set of heuristics for efficient entries and exits.
First of all, no indicator works well for every trader, every asset and every timeframe. Most of them don't work. You need to practice a lot to find the right mix that works for you.
In this post, I will explain what RSI is and how it can be used as a confirmation indicator.
Is it oversold or overbought?
The Relative Strength Index is 40 years old as it was first introduced by American mechanical engineer and real estate developer J. Welles Wilder Jr. in 1978.
It’s quite straightforward. The indicator oscillates between 0 and 100. When it goes above 70, it means that an asset is overbought and when it goes below 30 - it’s supposed to be a sign its oversold.
RSI can give you information about the trend. If it's below 30, you could consider buying the security, and if it’s over 70, it may be the time to take a short position. During strong trends, RSI can stay above 70 or below 30 for a longer time.
During a bull's market, the RSI usually oscillates between 40 and 90, and when it reaches 40-50, it defines the support level. On the other hand, when the bears take over the indicator oscillates between 10 and 60 with 50-60 mark indicating the resistance level.
Failure Swing Top and Failure Swing Bottom
Now, let's move to some RSI-related nuances. If an asset goes to a new high or falls to a new low, and an RSI hasn't confirmed the price movements during that time frame, this is often considered to be a trading signal for reversal.
The RSI also has its version of double tops and double bottoms. Just take a look at the AUDNZD 1D chart below. If a local high (1) was not exceeded and is followed by a lower high (2), it's a good idea to take a short position at the point then RSI falls below the local low (3). This is called Failure Swing Top. A reverse situation is called a Failure Swing Bottom.
That's it from a practical point of view. The RSI signals appear when the indicator goes over 70 levels or under a 30 level. In the oversold levels, you may consider opening a BUY order, and in the overbought levels, you may consider opening a SELL order.
Now, let's take a look at AUDNZD in the last months. The RSI gave no strong signals in this period. However, it moved over 70 in April staying in "oversold" territory for a while.
For those of you, who would like to learn how it works with this Forex pair, I’d recommend following the AUDNZD in the next days with the RSI indicator turned on.
Good luck trading!
Trading in the products and services of SimpleFX may result in losses as well as profits. In particular trading in leveraged products, such as but not limited to, cryptocurrency, foreign exchange, derivatives and commodities can be very speculative. Losses and profits may fluctuate both violently and rapidly.
Editors’ Picks
AUD/USD appreciates as US Dollar remains subdued after a softer inflation report
The Australian Dollar steadies following two days of gains on Monday as the US Dollar remains subdued following the Personal Consumption Expenditures Price Index data from the United States released on Friday.
USD/JPY consolidates around 156.50 area; bullish bias remains
USD/JPY holds steady around the mid-156.00s at the start of a new week and for now, seems to have stalled a modest pullback from the 158.00 neighborhood, or over a five-month top touched on Friday. Doubts over when the BoJ could hike rates again and a positive risk tone undermine the safe-haven JPY.
Gold price bulls seem non-committed around $2,620 amid mixed cues
Gold price struggles to capitalize on last week's goodish bounce from a one-month low and oscillates in a range during the Asian session on Monday. Geopolitical risks and trade war fears support the safe-haven XAU/USD. Meanwhile, the Fed's hawkish shift acts as a tailwind for the elevated US bond yields and a bullish USD, capping the non-yielding yellow metal.
Week ahead: No festive cheer for the markets after hawkish Fed
US and Japanese data in focus as markets wind down for Christmas. Gold and stocks bruised by Fed, but can the US dollar extend its gains? Risk of volatility amid thin trading and Treasury auctions.
Bank of England stays on hold, but a dovish front is building
Bank of England rates were maintained at 4.75% today, in line with expectations. However, the 6-3 vote split sent a moderately dovish signal to markets, prompting some dovish repricing and a weaker pound. We remain more dovish than market pricing for 2025.
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