Relative Strength Index Indicator (also referred to as RSI Indicator) is a Forex indicator that helps you determine overbought and oversold market conditions, thus determine entry points. Because it is an oscillator indicator, it has a range of 100 points that reflect the bias of the market.

How can I add Relative Strength Index to my Forex chart?

MT4 RSI

From the menu at the top of your Forex trading system (I am using MT4 platform in this example), go to INSERT then INDICATORS then OSCILLATORS then click on Relative Strength Index (or RSI).

A message box will pop up with a few settings to adjust, the default settings are OK, however, feel free to change the Period field, here is a quick guide to how to choose the Period:

14:  The default number and actually the most commonly used.

9:  This will give you more signals, but the signals wont be that reliable all the time.

25:  This will give you very few signals, but those signals you will see are more reliable than any of the other settings.

Of course you can change the color and line shape however you want.

How can I use RSI Indicator in my Forex trading experience?

RSI indicator can spot the overbought and oversold spots, those spots usually represent potential entry point for you.

To buy with MT4 RSI indicator:

When the market is oversold (means that there has been too much selling going on and the selling preassure started to loose steam) the market tends to get less sellers and thus more buyers, so this is a good buying opportunity for you.

When the market is oversold, Relative Strength Indicator shows the market at or below the 30 level. Then this should be a good entry point for you.

To sell with MT4 RSI Indicator:

When the market is overbought (there has been too much buying going on and the buying preasure started to cool down) the market tends to have less buyers and thus more sellers. This should be a good selling opportunity for you.

When the market is overbought, RSI Indicator shows the market at or above the 70 level.

What is RSI Failure Swing, and how can I use it in Forex trading?

( You can check Failure Swing in details here. otherwise continue reading)

A failure swing is when the market tries to breakthrough and stay in overbought or oversold areas and it fails, then it tries again and it fails.

Because the market tried really hard and it failed, its failure is usually very bitter, so it is expected to go the other direction with a strong bias.

There are two types of Failure Swings, a Bearish Failure Swing and a Bullish Failure Swing.

Bearish Failure Swing:

A typical Bearish Failure Swing occurs in this fashion:

1: The market breaks through the 70 overbought level.

2: The market fails to continue rallying, it falls down below 70.

3: The market rallies again to a new high (number 3), but this high is lower than the previous high (number 1).

4: The market falls again, scores a new low (number 4) which is lower than the previous low (number 2).

In this case, the market is expected to fall dramatically, because it is well known now that it failed to rally, though it tried hard enough twice.

Bullish Failure Swing:

A bullish failure swing is exactly the opposite of what we saw in bearish failure swing, the following picture will give you an idea, if you want to read the details make sure to visit the Failure Swing page.

Can I use Relative Strength Index for pattern recognition?

Yes, RSI indicator is very good for pattern recognition, it shows best the Head and Shoulders pattern and the Triangle patterns.

Here is an example of how it shows the head and shoulders pattern very clearly, though it was very invisible on the price chart:

Remember:

• Market does not stay forever overbought or oversold, but there is nothing that says it cant be for a while. So do not expect market to bounce back from overbought/oversold level immediately).
• If the market is overbought, do not go short before RSI closes below 70.
• If the market is oversold, do not go long before RSI closes above 30.
• Trade chart first, then RSI second, means that you cant just depend blindly on RSI and enter a trade when it comes down from overbought or up from oversold; you need to see first there there is a trading opportunity on the price chart itself, then check RSI to confirm this position. Best is to have an agreement between the price chart and RSI.

Trading breakouts is one of the most popular Forex trading strategies out there, the reason is simple. Breakouts trading offers the most comprehensive and often-repeated opportunities, however, nothing is perfect, you have to be careful not to get tricked and trade in the wrong direction. For that you have to ALWAYS appoint a Stop Loss point.

Anyway, here is how you trade chart breakouts

Note that this example is traded on a bullish breakout, you can certainly apply the same trading strategy on bearish breakouts as well.

As usual, check your trend bias. To apply this trading strategy you should find a good ranging market, or a market that is not having too much bias for neither bulls nor bears.

Locate the previous highest point where the market has reached lately, notice that in this example (in the pictures below, the market was hesitant forming long candlewicks about 100 candles earlier or so. This same level has been visited once before too, thats why I am taking it in account.

Notice that the price is supposed to respect the resistance area, but you will find later on that it didnt.

In this case we wait and see what happens, if price falls again and goes through the same ranging market circle, we would just wait for another chance of a breakout, and while we are waiting we can still trade the range bound market and place all our trades in the direction of the trend (the trend we had before the ranging market occurred).

It did not fall, it did go straight up and made a small breakout, however we wont count on this, we will just wait further and see how the next candle will be looking like.

The candle close above the resistance level which is a good sign, some traders would enter now, however more conservative traders like myself need to see one more blue candle to form and close above the resistance.

Now that we have a confirmation with a wonderful blue candlestick, we can now enter our trade and expect the price to go further with the same bullish bias.

Notice that you should usually place your stop a couple of pips below the resistance level. If you prefer to place your stop somewhere else go ahead and do it, but in all cases please DO place a stop.

As you see, the price has gone up for over 500 pips, far more than what I ever thought.

Remember that you dont have to do this with a bullish breakout, you can trade breakouts both ways.

Always enter the trade when you are 100% sure of what you are doing, there are tons of currencies out there in Forex world, you do not have to trade a particular pair if the market is not clear. And it is a very good idea to always wait for price back testing to make sure you are doing the right thing.

Though the longer framer provide better and more accurate trading opportunities and also applies best the various technical analysis techniques and tools, there are still more trading opportunities on shorter frames, though on these frames the chances are not much solid, they still provide more trading spots than the shorter ones.

To trade shorter frames, you have to take long frames in consideration. The reason to look into larger frames is to have better understanding of the market bias.

In order to trade this way, follow the following steps:

1: Choose the frame you want to trade on, depending on what kind of trader you are and how much time and money you are willing to invest. Trading shorter frames requires less time and money, while trading longer frames can take hours or even days of regular observance.

2: After choosing the time frame you want to trade on, go to a bigger frame to locate the trend, seeing if it is an uptrend, a downtrend or a range bound market.

When you choose a bigger frame, keep it mind to use 1:4 to 1:6 ratio. For example, you want to trade on one minute chart, you have to locate the trend on a 5 minute chart.

Check this table of charts and how to recognize the trend bias on them. To trade on one of the charts on the left, you have to locate the trend on the right side of the table.

You want to trade in