Digging into the quintessential overbought oversold indicator! Oscillator indicators in general, are risky and unreliable beasts. They might look friendly and approachable at first, only to BITE estrategias forex con fibonacci number hand off just when you are most comfortable! The RSI indicator is usually the go to oscillator for the novice trader when deciding to enter that first trade.
Come on, admit it, we have all done it! We take a quick glance at the RSI indicator in search of that sweet confirmation bias when we are just itching to make a trade. It is almost impossible to resist the siren call of a trading signal from our favorite indicator. But approaching trading in a passive fashion like this is dangerous and will lead to the destruction of your account eventually!
In this article I will teach you how to avoid some of the major pitfalls that beset most beginner traders when it comes to the RSI indicator. I am going to break down the RSI indicator so you understand it from head to toe. I will explain the top 5 RSI trading strategies that we hear so much about, what they mean and how to trade using them. 1000, and a sensible stoploss strategy. These are the nitty gritty details on how the RSI indicator is built. In reality your charting software will do this calculation for you, thats what technology is for!
1: Pick the base number of periods on which to base the study. 2: compare todays closing price with yesterdays. 3: add all the upward movements in points between closing prices. 4: add all the downwards movements between closing prices. RSI definition, what does it all mean for my trading? The RSI indicator Has definitely got one up over its competing oscillator in the fact that it has fixed points extremes at 0 and 100.
Rather than the relative floating extremes of say the Momentum or Rate of change oscillators. In that sense it does give the trader a base to work from in judging one period of market action to another. The RSI indicator is also smoother than it’s big brothers, Because it uses the Exponential moving average, it tends to be less jumpy and more consistent. If the indicator is below 30, then the price action is considered weak and possibly oversold. If it is reading above 70, then the asset is after a strong uptrend and could be overbought.
Buying when the indicator crosses 30 to the upside means you are counting on the trend reversing and then profiting from it. The same is true for selling when the RSI crosses down below 70 and using this a sign that the market is reversing from a strong uptrend. Life is never that simple though, and more often than not, you will find that the risk involved in this type of simplistic approach is ruinous to you account balance. New traders tend to gravitate to the RSI when attempting to delve into analysis for the first time.
However, you cannott ignore the hugh failings of the RSI indicator in a strong trend! This is no good to the novice trader who pressed the sell button without placing a stop! Dont jump right in when you see a reading of 90, first allow the RSI line to fall back below the overbought line to at least give a stoploss level to trade off . Watch the Centreline for trend confirmtion. If the RSI line reaches an extreme and then returns to the centreline it is a better indication of a turning point in the trend. Waiting for this to occur can cut out those nasty impulsive trades!