Hello, my friend, and welcome to this tutorial on Forex RSI Indicator Strategy. This post discusses the Forex RSI indicator system using RSI for day trading or swing trading (also works for the stock market, futures, E-minis, and options) as a replacement for the stochastic indicator or MACD indicator. Enjoy!
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Forex RSI Indicator Strategy – Video
Today, I’m going to show you a Forex RSI indicator strategy that can be used for stocks, futures, eminis, and options. We will use Forex examples today, but this strategy is also applicable to other markets. It is one of the most effective RSI trading strategies that I have seen, and it can be used for day trading. It is a bit more advanced, I would say intermediate. We will not be using divergences, unlike what many people teach. I will explain why soon.
The RSI is a momentum indicator, just like the stochastic indicator and the MACD indicator. These are all momentum indicators, and it is important to understand this. When we talk about strength and momentum, think of a train. A train moving on the track has a lot of energy. We are looking for a sustained power, just like a train that keeps going even if the brakes are applied.
The Setup – Forex RSI Indicator Strategy
Now, let me show you how I have the RSI indicator set up. I use 14 periods, which is quite common, and I have removed the moving average that is usually associated with the RSI. I set the RSI line to red, but the color doesn’t really matter. The upper and lower levels are set at 30 and 70, which is also common. However, you can use different parameters if you prefer.
The strategy is as follows: as long as the RSI indicator’s red line is between 30 and 70, there is no strong momentum in either direction. We want to see the first time that the indicator hits 70, indicating strong upward momentum. This is like a train going very fast in the north direction, with a lot of energy. We don’t want to trade based on the indicator alone. An indicator simply shows what is happening, it is not a fortune-teller. It is a mathematical formula that represents momentum. So, we look for other factors to confirm the strength.
Enter the Trade in the Direction of the Trend
When the indicator hits 70 for the first time, we look for a break above a resistance level. This confirms the strength. Then, we wait for a retracement back to the 20-period moving average (or your preferred moving average). This provides a support level. We want to enter the trade when the trend continues to move up with its momentum.
We emphasize the first time the indicator hits the upper line at 70 because we want to enter as early as possible into a new trend. Professional traders always enter early, while amateur traders enter late. Taking the first signal allows us to potentially catch a long-lasting trend. However, not all signals will continue for a long time, so risk management is important.
Risk Management is Key – Forex RSI Indicator Strategy
Now, let’s look at a different scenario. Sometimes, the indicator hits the lower line at 30, indicating downward momentum. In this case, we don’t have a clean setup like before because we have already broken a support level. However, we can still trade this setup. We wait for a retracement and look for a bearish candlestick pattern as an entry signal. We can also look for a previous support level that has been broken and retraced back to. In this case, we may need to look further back in history to find the support or resistance level.
Remember, this is just a three-step strategy that can be combined with other indicators and tools. Don’t rely on just one indicator for your trading decisions. Also, make sure you have a solid risk management and money management plan in place.
Wrapping Up!
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