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.