How to Use Relative Strength Index in Forex Analysis

Relative Strength Index (RSI) is a Forex analysis tool that can be used to determine the strength of the Forex market at a given time.

Like the Stochastic Indicator, the RSI helps traders to identify overbought and oversold assets in the market.

It is measured on a scale of 0-100.

If the reading is below 30 in a certain period, then the market condition is oversold, and there is a chance of market prices rising.

The occurrence of an oversold condition in a downtrend could also be an indicator of a reversal to an upward trend, which gives a buy signal.

On the other hand, if the RSI reading is above 70, then the current market condition is overbought. Thus, the chance of prices weakening increases.

When the overbought condition occurs in an upward trend, then it could indicate a reversal to a downtrend, which is a perfect entry point for a sell order.

The Relative Strength Index in Forex trading may also be used to recognize centerline crossovers.

A rising centerline crossover occurs when prices move above the centerline (50), and that shows an upward trend. Movement towards the 70 line shows a bullish trend.

Movement of prices below the centerline (50) towards the 30 line indicates a bearish trend or a sell signal.

Relative Strength Index is used to identify possible tops and bottoms when the prices are overbought or oversold respectively. In the figure below, the bottom is identified where the market is oversold.

Relative Strength Index oversold

As shown in the figure, the prices have fallen below the 30 line, showing that sellers could be tiring out, and a new trend is almost forming. A savvy trader will wait 2 or three 30-minute candlesticks to confirm an uptrend and enter the market with a buy order.

The RSI can also be used to confirm the formation of a trend.

For an uptrend, wait to see the prices crossing above the centerline (50).

As shown in the figure below, a downtrend is confirmed when the prices cross below the 50 line.

Relative Strength Index in forex trading

Summary

Relative Strength Index is used to determine oversold and overbought market conditions.

Overbought conditions occur above 70 line of the RSI and indicate weakening of prices, which could signal reversal to a downtrend.

Oversold conditions occur below the 30-line and indicate the strengthening of prices, signaling a new upward trend.

A price fall below the 50-line confirms a bearish trend

An increase of prices above 50-line confirms a bullish trend

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