RSI, the Relative Strength Index is one of the few trading indicators used in Forex trading that can actually act as a standalone trading system. A standalone trading system is a system that does not use additional indicators to confirm a trade.
How many indicators are you using on your charts? If you are like many traders you are using as many as 3 or 4. What kinds of indicators are most often used? Moving averages, hand drawn trend lines, MACD, RSI, ATR, CCI, Fibonacci, Elliott Wave, price action, chart patterns, candlesticks, etc. Anytime we are using multiple indicators to trade we are not using a standalone system. We are trying to determine price direction at some point in time that will move in our favor and we are using multiple indicators to do it. This is a flawed approach although it seems logical. The RSI uses processes within the RSI itself to determine whether a trade should or should not be taken.
The vast majority of people do not know the value or RSI because they have been taught the conventional use of it; however the conventional use is incorrect. Overbought and oversold cannot be determined by RSI or by any other indicator and divergences created by using RSI and/or other indicators is also a flawed trading methodology.
RSI New Concept #1 – The 4 RSI Trading Signals
There are 4 signals that alert the trader using RSI to changes in the momentum of the market. Without momentum the trader is lost and not knowing the direction of momentum is worse. You can know both by understanding where these signals occur and when.
RSI New Concept #2 – RSI Range
RSI trends fall into areas of RSI and stay there until trends change. Knowing these changes allows the trader to look at a chart and know immediately where RSI must stay in order to maintain the trend. Knowing this gives traders additional locations to enter or exit trades depending on the circumstances.
RSI New Concept #3 – RSI Range Shifts
When RSI moves from one point to another it signals the end of one RSI Range and the beginning of another. These Range Shifts are clues for the trader to map out where price is going. Knowing with high probability that a Range Shift is about to occur is one of the more profitable tools a trader can have.
RSI New Concept #4 – Momentum 1, 2 and 3
This 4th concept is perhaps the most important. Without it there is no trade. Entering a trade with the expectation that something will happen and it doesn't, is one of the most frustrating things a trader can experience. Momentum 1 and 2 can be seen on RSI charts. Momentum 3 is then made more predictable. Momentum 3 is what makes money for the trader. Statistical data improves the probability of Momentum 3 by locating times in which momentum happens most.
RSI New Concept #5 – Levels of Success
RSI or any other trading system that does not have a known target at the time of the trade is not a trading system.
These concepts are the core principles that make trading RSI as a standalone trading system a measurable and successful trading system.