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.
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.
What is a Moving Average?
Moving average is simply a Forex technical analysis tool that helps you identify the average price of a certain currency during some specific time. Let’s say for example:
We have two currencies A and B, and we want to know the average of the price (exchange rate) of the currency A last week.
- On Monday, the price of A was 2 B’s. Means if you want to get one A you would have to pay 2 B’s in exchange.
- On Tuesday, the price of A was 3 B’s. Means if you want to get one A you would have to pay 3 B’s in exchange.
- On Wednesday, the price of A was 4 B’s.
- On Thursday, the price of A was 5 B’s
- On Friday, the price of A was 6 B’s.
To know the average price of this currency last week, what would you do? You simply add all the prices together, then divide them by 6 (number of days we are looking at).
2+3+4+5+6 = 20 (Prices of the 6 days added up together)
20/6 = 3.3 (then divided by 6, which is the number of days)
Then, the average price of A last week was 3.3 B’s. And now what we have done actually is created a 6 day Moving Average!
The good thing is that we do not have to do all that work, we have an indicator called Moving Average, that does all the math and give us a visualized up-to-date answer.
How can I add a Moving Average to my chart?
Very easy. I will guide you on how to do so on both Meta Trader or FXCM platforms, the most two popular Forex trading platforms. Pick the Forex trading software you use and just follow the steps:
To add a Moving Average on Meta Trader:
- First, log in to your Meta Trader platform and wait till it fully connects.
- From the menu on the top left of your Meta Trader, choose Insert > Indicators > Trend > Moving Average.
- You will have a message box asking you for details, just choose the number of days you want your moving average to represent and the color, then choose ok.
What are the most popular Moving Averages?
You will meet many different Moving Averages, you will see theme everywhere on your Forex trading journey, they are a part of many indicators and Forex trading strategies. However, when we talk about stand-alone Moving Averages, I got to tell you that there are only two or three that the majority of Forex traders use.
100 Day Moving Average
Did you understand the example above? Well, this is the same, just that we put 100 days instead of 6. Let me explain it again.
- First we take the prices of the last 100 days.
- We add them all together.
- We divide the sum by 100.
This 100 Day Moving Average is, as far as I know, the second most popular Moving Average, that comes only after the 200 Day Moving Average…
200 Day Moving Average
This is the most popular Moving Average, and therefore, it is a very strong indicator, because it is displayed on MANY trader’s screens and they consider it when they make their moves, so they give it more and more power when they use it. Here is how the 200 Day Moving Average is calculated:
- First we take the prices of the last 200 days.
- We add them all together.
- We divide the sum by 200.
Moving Average Buying Signals:
- When the price rises and closes above a moving average.
- When a short moving average crosses up a long moving average. e.g. 50 day moving average crosses up a 100 day moving average.
Moving Average Selling Signals:
- Whe the price falls and closes below a moving average
- When a short moving average crosses down a long moving average. e.g. 50 day moving average crosses down a 100 day moving average.