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?
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 won’t 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:
- Market does not stay forever overbought or oversold, but there is nothing that says it can’t 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 can’t 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, that’s 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 didn’t.
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 won’t 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 don’t 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…
You have to look for the trend in…
1 Minute Chart
5 Minutes Chart
5 Minutes Chart
30 Minutes Chart
15 Minutes Chart
4 Hours Chart
4 Hours Chart
3: If the market on the proper longer frame is an uptrend, then we should be looking only for buying opportunities on our short-frame chart.
If the market on the proper longer frame is a downtrend, we should be looking only for selling opportunities on our short-frame chart.
A “long” chart is often mentioned here meaning a chart of a long time frame. So is a “short” chart here means a chart of a short time frame.
The longer chart is, the more reliable it is and the more accurate information it provides. The reason is the number of trades each candle represents.
Longer frame charts offer the solid trading opportunities, while shorter frame charts offer more trading opportunities. You can say:
Long Charts = Quality
Short Charts = Quantity
You can draw Fibonacci or trends on a long frame, and still use it on a shorter frame.
Whenever you are looking for the trend bias, whether it is bearish or bullish, it is advised that you look at the last 100 candles or so. So if you are looking at a daily chart, you should look at the last 6 months data or so.
ALWAYS trade in the direction of the trend, not against it.
Choose the most obvious trading opportunity, whenever you have a not-very-sure trading enviroment, always change the currency pair you are trading, there are dozens of currency pairs in the Forex market to choose from.
What is a Range Bound Market (or a Ranging Market)?
A range bound market is a market that mainly moves between two lines, the upper one is called Resistance (because it resists the market from going upwards) and lower one is called Support (it supports the price in moving upwards).
As we see in the picture, a typical range bound market goes up till it finds a resistance level, it kisses it and goes back down it it reaches a support level, kisses it then moves back to the resistance level again, and so on and on.
How can I trade in a ranging market envionment?
Whenever the market reaches a resistance and starts to bounce down, you should be selling. And whenever the market reaches a support level and starts to bounce up, you should be buying.
However, you should only enter a trade that agrees with the previous trend, never trade against it. So if the previous market has been an uptrend, you should only be buying. And if the previous market has been a downtrend, you should only be selling.
How to Trade Forex Successfully?
1: Don’t invest too much money! Some new traders like us when they first start their Forex trading experience they wonder why they wouldn’t be winning all of their trades, so they would just go ahead and make big trades believing that they should succeed. The truth is, most people who start trading this way never have successful trades.
So always remember NOT to risk more than 1% to 5% of your Forex live account when trading, and keep in mind that this way you can perform more trades and thus gain more experience.
2: Depend on more than just one factor! There are tons of ways to predict price action, watching for previous resistance or support, Fibonacci retracements, indicators, candlestick patterns, chart patterns etc. Do not decide on your trade just using one of those things, but rather try to have at least two or three of them confirming your trading decision.
3: Always remember that you don’t have to trade this particular pair! Sometimes we see the chart slightly going up and because we feel like we need to be trading, we just make believe that there is a buying opportunity there, almost half of the time (or even more often) we make the wrong decision and we get disappointed watching a downtrend formation and our money goes to waste.
The only one way out of this is to make sure that the currency pair you are about to trade have a clear trading opportunity. We have dozens and dozens of currency pairs in Forex, always choose the pairs that have an opportunity that speaks for itself.
And please do not get confused with this next tip…
4: Try to be an expert in one pair of currencies! Is there a country that you are so interested in? You know its language? Political scene? Then why don’t you go ahead and try to learn more about its currency?! Try to monitor this country’s currency’s performance and see if it could be a good Forex trading candidate. The more you know about this currency and the political system of its homeland, the more successful and smart trader you will be.
5: DO use STOPS! Many new Forex traders ignore this, thinking they could just watch the trend and decide when and where to stop the losing trade (if they believe their trade could lose at all!) Using a stop will save you money in case something goes wrong with your internet connection or device, plus, you will have a clearer picture of where you are and how far you have gone when it comes to losses.
6: Back test! Go back on the chart to earlier times and try to think what you would have done back then that would have worked in this visual future. Get more ideas and Forex trading strategies analyzing the price action of the past.
Forex Trading Robot
Have you ever wondered what it would be like to have someone else trading for you? I honestly do not want to know it would be like because I enjoy Forex trading ALOT!, however, since Forex trading robots were invented a while back, more and more people get interested in Forex auto trading software and systems.
In order to choose a good Forex trade robot, you have to pick the most popular ones, knowing that you are not alone in depending on these unseen creatures. The most popular one out there is aparently the cAlgo of FXPro’s famous trading platform, cTrader ECN.
In order to use the robot you need cTrader ECN installed, and thus create an account with FXPro. Then automatically place BUY or SELL orders using the robot’s algorithm.
However, some knowledge of C# is necessary.
Please note that I am not a developer of this Forex Trading Robots software, nor am I an affiliate of its creator, so I can’t be held responsible for whatever issues it causes you, however, there are no issues expected to arise along your Forex trading journey using the robot, since the company behind it (FXPro) is a huge name in the market.
I do not use any Forex robot, I prefer trading manually using my traditional technical analysis methods, Indicators, Fibonacci, trendlines, support and resistance etc.
You might also be interest in this Free Signal Software for less automated Forex trading.
(Relative Strength Index)
Failure Swing is one of Relative Strength Index trading strategies (it is more of a case or condition that it is a strategy). Let’s first quickly review what Relative Strength Index (or RSI Indicator) is.
Relative Strength Index (also referred to as RSI) is a Forex indicator, it falls under the oscillator category so it consists of 100 points that reflect the position of the market.
The market is sometimes considered OVERBOUGHT, meaning there has been too much buying going on lately and the market can’t take more buyers, so it tends to get less buyers and and more sellers, thus the market falls. A market is considered overbought when it reaches the 70 level on RSI.
On the other hand sometimes the market goes OVERSOLD, meaning there has been too much selling going on, so the market starts to get less sellers and more buyers, thus the market rallies. The market is considered oversold when it reaches the 30 level on RSI.
The idea behind RSI is that it shows you when the market is overbought or oversold, thus it helps you locate good entry points to trade. Click here to read more about RSI in details. Or continue reading about Failure Swing:
What is Failure Swing?
A failure swing is a term given to the instance when the market tries to rally above 70 and it can’t, so it makes another try and it fails again. So it swings around the 70 line and it fails to break up. Or it tries to fall down below 30 and it fails, and then tries again.
There are two types of Failure Swing:
Bearish Failure Swing
Here is what happens during a bearish failure swing:
1: The market rallies up to the RSI overbought level (over 70.) It marks a high.
2: The market fails to go higher or even to stay on the same level, so it falls down below 70.
3: The market rallies up again and scores another high, but this one is lower than the high number 1.
4: The market goes down again and scores another low, this one is lower than the one in point number 2.
The market is expected to strongly take a bearish bias right after that.
Bullish Failure Swing
Here is what happens during a bullish failure swing:
1: The market falls to the oversold territory (below 30) and scores a low.
2: The market goes up to 30 or above and scores a high.
3: The market falls down again and forms a new low, however not lower than the previous low.
4: The market rallies up again to another high, higher than the previous high (2).
The market is expected to strongly rally now.
What does Ichimoku mean?
Ichimoku is a Japanese phrase that means “one glance”. Its creator Goichi Hosoda named Ichimoku that way because he wanted it to be one indicator that takes place of everything without the need of other factors or indicators.
What does Ichimoku consist of?
1: Tenkan-Sen: A 9-period Moving Average. This is the first line you have to adjust when you apply Ichimoku to a chart.
2: Kijun-Sen: This is a 26-period Moving Average. It is usually the second line you have to adjust when you apply the Ichimoku to a chart.
3: Chinkou-Span: Current price plotted 26 periods earlier.
4: Cloud: Better known as “Kumo”, which simply a Japanese word for “cloud”, and that is exactly what it is. Kumo tells us the volatility of the market, the wider the Kumo is, the more volatility is in the market. Note that in this article, you will encounter both words “Kumo” and “Cloud”, you don’t have to worry at all, both are the same and there is no difference at all between them. Just use the one that comes to your mind first.
How can I determine my bullish or bearish position using Ichimoku?
This is very easy.
When the Tenkan-Sen crosses up and walks above Kinjun-Sen, this means we have a bullish signal (buying signal). Look at this snapshot:
When the Tenkan-Sen crosses down Kijun-Sen, this means that we are having a a bearish signal (selling signal). Take a look at this:
Trading with Ichimoku Clouds
Kumo means cloud in Japanese language, and the Kumo of Ichimoku is simply a shaded area between two lines, one of them represents the range of resistance during a downtrend and support during uptrend (this is really not important to understand or to memorize).
When the trend is moving above the cloud that usually means it is an uptrend and then the Kumo would work as a support for the market. We should look for buying opportunities.
When the trend is moving under the cloud that usually means it is a downtrend and then the cloud would work as a resistance for the market. We should look for selling opportunities.
Can Kumo (Ichimoku’s Cloud) indicate what will happen in the future?
Nobody can tell exactly what will happen in the future, however, still Ichimoku’s Kumo produces 26 periods ahead of time. BUT, this doesn’t necessarily mean that price action will follow Kumo’s direction.
How can I trade with Kumo?
Remember that Kumo, at the end of the day, is just an interpretation of the trend direction. So (as we already learned, that market above Kumo is an uptrend market, and vise versa) if the market is moving above Kumo we should be looking for buying opportunities.
So, if we are looking for an Ichimoku buy signal, there are three circumstances we could face:
1: Tenkan-Sen crosses up Kijun-Sen (remember? this is a buying signal) above the Kumo. This means a VERY strong buying signal, because it simply agrees with the direction of the trend, which is going up (we knew it is going up because it is above the Kumo of course).
2: Tenkan-Sen crosses up Kijun-Sen inside the Kumo, which means an average-strength buying signal.
3: Tenkan-Sen crosses up Kijun-Sen below the Kumo, which is a weak buying signal, because it doesn’t agree with the direction of the trend, which is probably not an uptrend.
If we are looking for selling opportunities, we have three chances:
1: Kijun-Sen crosses up Tenkan-Sen (seling signal) below the Kumo. This is a very strong selling signal, because it agrees with the direction of the trend, which is a downtrend.
2: Kijun-Sen crosses up Tenkan-Sen inside the Kumo. This is considered to be an average-strength selling signal.
3: Kijun-Sen crosses up Tenkan-Sen above the Kumo, which is considered to be a weak selling signal, because it disagrees with the direction of the trend, which is probably an uptrend.
What is Ichimoku’s Chinkou-Span?
Chinkou-Span is basically the current price plotted 26 periods earlier.
If the current price is (slightly) higher than the lastest piece of Chinkou-Span, this is a bullish signal.
If the current price is (slightly) lower than the lastest piece of Chinkou-Span, this is a bearish signal.
To buy with Ichimoku, we should be looking for these circumstances combined:
Tenkan-Sen crosses uo (goes above) Kijun-Sen.
The crossover happens ABOVE the Kumo (cloud).
Chinkou-Sen is lower than the current price.
Note that losing one of those three factors would mean that our buy signal is weaker.
To sell with Ichimoku, we should be looking for:
Kijun-Sen crosses up (goes above) Tenkan-Sen.
The crossover happens BELOW the Kumo (cloud).
Chinkou-Sen is higher than the current price.
Where can I put my Stop Loss when trading with Ichimoku?
There are basically two default places that traders would place their stops at when trading Forex with Ichimoku. Let’s look at them:
Bulls (buying traders) would look to set their stops on one of those:
The Kijun-Sen level (usually very short room for price to move in)
Level of last lowest support (more risk)
However, for strong buy signals, traders could be willing to give more room for the price to range in, so they would place their stop on either the upper side or the lower side of the Kumo, depending on how risk-taking they can be.
Bears (selling traders)
The Kijun-Sen level (usually very short room for price to move in)
Level of last highest resistance.
However, for strong sell signals, traders could be willing to give more room for the price to range in, so they would place their stop on either the upper side or the lower side of the Kumo, depending on how risk-taking they can be.
What is MT4 Stochastic Oscillator?
Stochastic Oscillator (simply referred to as Stochastics) is an oscillator indicator, and because it is an oscillator, it consists of a scale of 100 points. It shows you when the market is oversold or overbought, helping you find good entry and exist points.
How can I add Stochastic Oscillator to my Forex trading platform?
Insert > Indicators > Oscillators > Stochastic Oscillator
How can I trade with Stochastic Oscillator?
To buy with Stochastics
To buy with Stochastics you should be looking for these circumstances to occur:
- The market has to be in an uptrend, and having a pullback (short bearish movement).
- Stochastics crosses below 20.
- K line crosses above D line.
- A candlestick closing in bullish style.
In that case, your initial stop should be a few pips below the last low.
Check the example in this picture:
To sell with Stochastics:
To sell with stochastics, you need to wait for the following circumstances to occur:
- The market is in a downtrend and it takes a short pullback (a short bullish movement).
- Stochastics crosses above 80.
- The K line crosses below the D line.
- Wait for the candlestick to close in a confirmation bearish style.
You can place your stop at the latest high level.
Check the example in the following picture:
How can I add Bollinger Bands to my Forex chart?
From the main menu on your Forex trading platform (here I am using Meta Trader), go to
Insert > Indicators > Trend > Bollinger Bands
Then a message box will show up with some options to change, leave everything unchanged and click OK. Note that you can change the color and the shape of the bands if you are already using these colors and shapes for other indicators, to prevent confusion.
Check the pictures here:
How can I judge the volatility of the market using Bollinger Bands?
The width of the Bollinger band’s (the space between the outter two bands) illustrate exactly the amount of volatility in the market.
- The wider Bollinger bands are, the more volatility is in the market.
- The narrower Bollinger bands are, the less volatility in the market.
How can Bollinger Bands help in placing my trade?
Many traders would wait for a breakout, where the market breaks up or down the Bollinger Bands, and then they place their trade in the direction of the breakout.
On the other hand, other traders would use the Bollinger Bands are support and resistance levels, so they would buy when the price kisses the support Bollinger band and sell when the price kisses the resistance Bollinger band.
However, whether you would go for the first method or the second, remember that you can’t be completely dependent on the Bollinger Bands and forge about the other technical analysis methods such as Fibonacci, candlestick formations or other Forex indicators. Always make sure to double and triple check your trade entries.
- Because Bollinger Bands are volatility indicator, most of the price action (arguably over 95%) should fall beween the bands.
- To confirm our buying entry using Bollinger Bands, we have to wait for a candle closing with the same bias. (blue candle for buying and red candle for selling). Then we take action.
- Most common settings for Bollinger Bands are 20 period Moving Average and 2 Deviations.. However, it is best to set the Deviations as 3.
- The price can, and sometimes does, go above the upper Bollinger band and when it does, it means we have a very strong uptrend.
- The price can (and sometimes does) go below the lower Bollinger band and when it does, it means we have a very strong downtrend.
- IN TRENDING MARKETS: Some traders change the Deviations settings to 1. And they buy when they see an uptrend and the price breaks out of the upper Bollinger band. Same traders would sell when they see a downtrend and the price breaks out of the lower Bollinger band.
- IN RANGING MARKET: Bollinger Bands should help you determine entry locations. It works as support and resistance locator. In this case, it is advised to use 50 period moving average and “2” standard deviations. In this case, to confirm our ranging market, we should have horizontal bands and the price should not try too hard to touch the bands.
- After having the bands going horizontal and the market is ranging for a while, we should expect the price to start trending again, usually in the same direction as it did before going in range. We should look for support (lower band) to place our trade at (in case the previous trend before the ranging was an uptrend. On the other hand, if the previous market was a downtrend, we should look for our resistance (upper band) and place our trade there and wait for the price to fall down again.