Relative Strength Indicator (RSI) & Stochastic Oscillator

Relative Strength Indicator (RSI):

Relative Strength Index (RSI), an oscillator introduced by J. Welles Wilder. The RSI is based upon the difference between the average of the Forex closing price on up days vs the average closing price on the down days over a given period, and is plotted on a vertical scale of 0 to 100.

Wilder advocated a 14-day RSI, although shorter and longer periods have gained popularity when the market exhibits certain characteristics. Generally, RSI is measured in a period between 5 and 25.

How to use it?

Wilder recommended using 70 and 30 and overbought and oversold levels respectively. Generally, Forex Buy signals are triggered when RSI is in oversold (20-30) area, potentially meaning that the stock is about to reach its low for this trend, and Forex Sell signals are triggered when RSI is in overbought (70-80) area, potentially signaling a Forex market top.

Try to combine it with EMA and you’ll get great result on your trades.

You can use this technique for any currency at 1 Day time frame. We have to use 5 EMA (Green Line), 12 EMA (Red Line), and RSI 21.

Entry Rules for Short: Sell when 5 EMA (Green Line) crosses down and below 12 EMA (Red Line) and RSI is below 50.

Entry Rules for Long: Buy when 5 EMA (Green Line) crosses up and over 12 EMA (Red Line) and RSI is above 50.

Exit rules: Exit when 5 EMA (Green Line) and 12 EMA (Red Line) cross again or when RSI crosses back through 50.


Stochastic Oscillator:

The Stochastics oscillator, a popular and dynamic indicator developed by Dr. George Lane, is based on the premise that during an upward trading Forex market, Forex prices tend to close near their high and during a downward trading market, Forex prices tend to close near their low.

Typically used to identify overbought and oversold conditions the indicator consists of two lines: % K and %D. The range of the Stochastics is between 0 and 100. With a price range of ten to twenty, ten would be given a 0 designation, fifteen would be at 50, and a price of twenty would be at the 100th percentile. The values of the stochastics calculations are dependent on the parameters given to %K and %D.

Readings below 20 are considered oversold and readings above 80 are considered overbought. However, Lane did not believe that a reading above 80 was necessarily bearish or a reading below 20 bullish. A Forex Market Price can continue to rise after the Stochastic Oscillator has reached 80 and continue to fall after the Stochastic Oscillator has reached 20. Lane believed that some of the best signals occurred when the oscillator moved from overbought territory back below 80 and from oversold territory back above 20.

How to Use?

When the faster %K line crosses above the slower %D line and the lines are below 20, a Forex buy signal is generated. When the %K lines crosses below the %D line and the lines are above 80 a Forex sell signal is generated.

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