Occasional new uses for old things can benefit us or they become new and improved. RSI, the Relative Strength Index is one of those things when it comes to Forex trading. Until recently RSI has been used to determine if prices are overbought or oversold. In fact, many traders still use it that way; even experts. However, RSI it has been shown is not a good indicator of overbought and oversold. Traders who use it to tell them when prices are too high or too low are kidding themselves. No indicator can do that.
Secondly, RSI has always been one of the main indicators to locate divergences in price and momentum. Although this is an algorithmic signal, traders misunderstand why and when it forms.
The New Concept of RSI Signals
The first and most important New Concept for RSI is that there are just 4 signals that the trader needs to be aware of. They are bearish and bullish divergences and bearish and bullish reversals. These signals can be located manually on any RSI chart or they can be located automatically on the RSI Paint Indicator, an indicator specifically designed to find all divergences and reversals. Reversals signals lead to significant profits trading Forex wherever you are a scalper, short-term trader or long-term trader.
See any chart and know how to read it
Many traders, in particular new traders, look at charts and beginning drawing trend lines. Why? Because they have been taught to do it by books, seminars, and web sites. Without going into it, this is wrong. Trend lines have no value except to tell you where trend has come from, not where it is going. Trader's need methods to determine momentum because it is momentum that causes a trade to be successful. RSI using the 4 signals lays out a clear picture of what is happening on any trading chart. This can be done by hand or it can be done automatically using the specifically designed Paint Indicator for Metatrader 4, so that the trader does not have to do it.
Momentum means money
If you knew where the momentum would be in the market and you knew when it would occur and you knew which direction it was going, you would be a very rich person. RSI, using the 4 RSI signals, locates momentum. The 4 signals locate Momentum 1 which is Retracement Momentum so that the trader knows where the trade is retracing and they locate Momentum 2 which is Continuation Momentum so that the trader knows when prices are going to re-join the trend.
What else does a trader need to know?
Momentum 3 is the momentum created by the market. This momentum is not random. It can be located by studying statically where it most often occurs. This momentum is the momentum that moves price in the direction that makes money.
When you trade using RSI you will know what the currency pair you are trading is doing. You will know the momentum points and you will know when Momentum 3 has the most chance to occur. These New Concepts in RSI make it an invaluable trading method, one that brings success.