A Simple Way To Trade RSI

Talking Points:

• Every trader should have a method of identifying potential Forex trades.
• Identify Swing highs and lows to find the trend.
• RSI overbought and oversold levels can be used for market entries.

Every trader needs a plan of action when approaching the Forex market. However, with so many strategy choices it can be difficult for a beginner to identify and then execute a proper trading strategy. Today we are going to review the basics of a simple RSI strategy, based on finding the trend then utilizing an oscillating indicator for timing market execution.

So let’s get started!

Identify the Trend

The first step to trading any successful trend based strategy is to find the trend ! One of easiest ways to find the trend is through identifying a charts swing highs and swing lows. Traders can work from left to right on their graph and identify the outliers in price. If you see the peaks and valleys of price declining consistently, you are looking at a downtrend. If highs and lows are advancing, traders would consider a currency pair to be trending upward.

Given this information, traders should look to sell the AUDNZD as long as price continues to decline towards lower lows. If the trend continues, expectations are that price will decline allowing traders to look for new areas to sell the market.

Learn Forex – AUDNZD Trend

(Created using FXCM’s Marketscope 2.0 charts)

RSI for Entry

Once a strong trend is established, traders will look to join that trend with a technical market trigger. Oscillators are a family of indicators that are designed specifically to determine if momentum is returning to an existing trend. Below we can again see the AUDNZD 8 Hour chart, but this time the RSI (Relative Strength Index) indicator has been added. Since we have identified the AUDNZD as being in a downtrend, traders will look to sell the pair when the RSI indicator crosses back below a value of 70 (overbought). This will signal momentum returning lower after the creation of a new swing high.

Below you will find several previous examples of RSI entries signaled on the AUDNZD. Remember since the trend is down, only new sell positions should be initiated. At no point should a buy position be considered as price declines.

Learn Forex – AUDNZD & RSI

(Created using FXCM’s Marketscope 2.0 charts)

Manage Risk

Every good strategy needs a risk management component. When trading strong trends such as the AUDNZD, it is important to realize that they will eventually come to an end! Traders have a variety of choices when it comes to stop placement, but one of the easiest methods is to use a previous swing high on the chart. In the event that price breaks towards higher highs, traders will wish to exit any existing sell biased positions and look for new opportunities elsewhere.

Wether you are trading live money or just practicing on a demo it is also recomended to review your trades. This way you can track your progress while making sure you adhere to the strategy rules!

---Written by Walker England, Trading Instructor

To contact Walker, email instructor@dailyfx.com. Follow me on Twitter @WEnglandFX.

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Want to learn more about trading RSI? Take our free RSI training course and learn new ways to trade with this versatile oscillator. Register HERE to start learning your next RSI strategy!