Trading in the direction of a strong trend reduces risk and increases profit potential. Relative Strength Index helps traders to take informed decisions. Trend trading attempts to capture gains through the analysis of an asset’s momentum in a particular direction.
The relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock.
There are several ways to utilize the moving average. The first is to look at the angle of the moving average. If it is mostly moving horizontally for an extended amount of time, then the price isn’t trending, it is ranging. A trading range occurs when a security trades between consistent high and low prices for a period of time.
If the moving average line is angled up, uptrend is underway. However, moving averages don’t make predictions about the future value of a stock; they simply reveal what the price is doing, on average, over a period of time.
How to set up RSI?
Most traders prefer a candlestick chart and currency pairs such as EUR/USD, EUR/JPY, stocks and the cryptocurrencies. Activate the RSI indicator on your trading platform. If you use timeframes 15 minutes and above, we recommended period 14. If you trade in turbo options, increase period to 24-26 to reduce the harmful influence of market noise.
Like all oscillators, Relative Strength Index is located below the price chart. It consists with levels and a signal line. Usually it is used to check the signals while crossing the zones. However, let’s try something different.
In fact, if you pay attention to the shape of the candlestick chart and the RSI signal line, you will notice that they partially duplicate each other. However, they are not identical. The RSI is built on a separate period and does not react to short-term price spikes. Hence, RSI signal line is a smoother version of the trend on the price chart. That is why let’s plot technical lines on the indicator.
There are some advice that all traders should consider:
- Firstly, do not react to false signals.
- Secondly, RSI shows the trend more clearly.
- Thirdly, RSI indicates the strength and direction of a trend, therefore you can better identify rebounds and breakouts.
Trading options using the Relative Strength Index
As mentioned above, the relative strength index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock.
For example, suppose the long-term trend of a stock is up. A buy signal occurs when the RSI moves below 50 and then back above it. Essentially, this means a pullback in price has occurred. So, the trader buys once the pullback appears to have ended (according to the RSI) and the trend is resuming. The 50-levels are used because the RSI doesn’t typically reach 30 in an uptrend unless a potential reversal is underway. A short-trade signal occurs when the trend is down and the RSI moves above 50 and then back below it.
It is enough to build a trend line on the indicator and buy an option on a strong signal. These include:
- Rebound from the trend line in the direction of the main trend;
- Breakout of the technical level with its reverse.
The expiration should be set at least the time of formation of three bars.
Indicators can simplify price information, in addition to providing trend trade signals and providing warnings about reversals. Indicators can be used on all time frames, and for the most part, they have variables that can be adjusted to suit each trader’s specific preferences. Traders can combine indicator strategies–or come up with their own guidelines–so entry and exit criteria are clearly established for trades.
Strategies based on RSI have stood the test of time and remain popular tools for trend traders who are interested in analyzing certain market indicators.