Regarding the indications that his novel indicator provided, Wilder had his own ideas. He was not satisfied to focus just on RSI crossing events, which may indicate an oversold or overbought situation. The 50% line was seen by him and others as a spot where intuitive insights may be attained. Finally, divergence—the locations where the RSI is working in opposition to the present price action—is another focus of this research. Last but not least, Wilder thought his RSI indicator may possibly transmit indications apart from pricing activity. This idea has been developed by other analysts as RSI bullish/bearish patterns.
Crossovers – The crossover of the 30/70 thresholds is the characteristic of the RSI that novices most frequently focus on without additional examination. These emphasis areas are highlighted by the six “Green” circles in the chart below, with the lower circles indicating oversold situations and the upper ones indicating overbought ones. Using the third circle as an example, we can see that the crossing happened long before the approaching upswing.
Mid-range signals – Wilder spoke extensively on the “50 percent” mid-line, which his RSI used to show support and resistance levels. The asset is losing more money than it is making when the RSI is tracking below “50 percent.” The converse is true when the RSI indicator trends above the “50 percent ” mid-line: profits outweigh losses.
Divergence – This occurrence happens when price movement is moving in one way while the RSI’s slope is moving in the other direction. View the chart starting at the sixth green circle on the right and then pay attention to the divergence that occurs over the next few time periods. The accompanying price action is favorable while the RSI activity has a negative slope. The trader is being warned of a probable fall by the RSI.
Bullish/Bearish trends – It is simple to refer to the research of many analysts that show that the RSI may be used in unique circumstances, but whether these circumstances are referred to be trends or swings is irrelevant. Observe from the rightmost portion of the green circle. Except for the brief period when the RSI passes the “30” level, the trend is positive. The RSI then stays above the “40” line for the length of the bullish trend. The RSI will respond in the opposite direction for a bearish trend.
Simple RSI Strategy
The trading system that follows is solely meant to be used for education. Technical analysis uses historical pricing patterns to project future prices, but as we have all heard before, past performance is not a predictor of future success. With that caveat in mind, the “Green” circles on the aforementioned chart show the best entry and exit positions that may be determined by combining RSI analysis with the red-added EMA.
The RSI’s period setting for this “30 Minute” chart sample was set to “8.” It is seen on the lower half of the currency pair “GBP/USD” above chart. The “Red” line, a new option on the MetaTrader 4 platform, indicates an exponential moving average for eight periods while the “Blue” line is the RSI.
High and low points are crucial reference points, particularly when the corresponding numbers cross 15 or 85. Although shorter timescales may be handled, as seen below, the “RSI Rollercoaster” often performs better for longer timeframes, i.e., daily. The RSI makes an effort to represent pricing velocity, but sideways market movement can be perplexing.
So, a straightforward trading strategy would be:
Choose your entry point when the EMA “Red” line crosses the RSI downward and the “Blue” line drops below the “30” lower limit line.
Put in a “Buy” order that accounts for little more than 2 to 3 percent of your account.
Set your stop-loss order 20 “pips” (approximately 75% of the average true range for the chart’s time period) below your entry point.
When the RSI surpasses the “70” upper limit line and is followed by a close crossing of the EMA “Red” line in an upward trend, decide where to quit the trade.