For traders who want to enhance the accuracy of their market analysis RSI (Relative Strength Index) It’s one of the must-have indicators for every trading session! RSI is a tool used to measure price momentum by analyzing price changes over a specific period. It helps traders identify Overbought or Oversold conditions, which can signal potential price reversals in the future with greater accuracy.
How to activate the RSI
How to use it: You can activate it in MT4 by going to Insert > Oscillators > Relative Strength Index.
You can use the default setting with a Period of 14, which is pre-configured by the system.
After that, the RSI indicator window will appear below the price chart. We use the RSI to observe the market’s buying and selling pressure during that specific period.
How to trade using RSI
1. Use it as a signal to open and close orders.
The way most traders use RSI is to observe the buying and selling pressure in the market to determine whether the current price is too high or too low. The indicator divides the zones into two main areas: Overbought and Oversold, marked by the levels 70 and 30 on the RSI indicator window.
If the RSI line rises above 70, it is considered the Overbought zone, indicating that there are many buyers in the market and the price is high, so there is a chance the price will reverse downward. Traders use this signal to look for a sell entry point. Conversely, if the RSI falls below 30, it is in the Oversold zone, indicating heavy selling pressure and a low price, so there is a chance the price will reverse upward. Traders then look for a buy opportunity.
In simple terms: “Above 70 means sell” and “Below 30 means buy.” However, the results may not always follow what the indicator shows. We may also use other factors as part of the decision-making process. For example, I personally use RSI mainly to find entry points according to the trend.
If the chart shows an uptrend, I wait for the RSI to drop into the Oversold zone before opening a buy order. Conversely, if the chart is in a downtrend, I wait for the RSI to rise above the Overbought level and then look for an opportunity to open a sell order.
2. Used to identify signals of price reversal.
As mentioned earlier, RSI is a tool used to observe the buying and selling momentum in the market at a given time, allowing us to apply it to find potential points where the price may reverse. This is done by looking at Divergence, which is a signal that occurs when the price chart moves inconsistently with the indicator.
Bullish Divergence
It occurs when the trend is downward, and the price chart makes a new lower low, but the indicator forms a lower high. This shows that while the price continues to decline, buying momentum in the market is increasing, indicating a potential reversal to an upward trend. Traders often use this point as a signal to look for a reversal and open a “Buy” order.
Bearish Divergence
It occurs when the trend is upward, and the price chart makes a new higher high, but the indicator forms a higher low. This shows that while the price continues to rise, the buying momentum in the market is fading, indicating a potential reversal to a downward trend. Traders often use this point as a signal to look for a reversal and open a “Sell” order.
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