5.8 Relative Strength Index (RSI) trading instructions Video Lecture | Forex: Learn and Master Trading (English) - Business Basics

hi welcome back to capex forex trading
comm in this video we're going to focus
on the relative strength index which is
usually referred to as the RSI now the
purpose of the RSI is to indicate if a
trend is either overbought or oversold
so it's a great indicator to use to get
into new trends but it's also a great
tool to use to take profits out of a
trend that's weakening that you're
currently in now the way in which this
indicator works is that it will compare
gains and losses in price that you see
in your charts here and then plot them
in a line format that's in this
indicator window here and the way in
which we know if the trend is either
overbought or oversold is by referencing
the scale that you see here on the right
hand side so we start from zero here and
go up to a hundred
but another two important levels that
you're going to notice at the level 30
and the level 70 the reason why they're
there is because if the RSI line goes
above the 70 level would take that as an
indication that a trend is overbought
and if the line goes below the 30 level
would take that as an indication that
the downtrend is oversold now the
default setting for RSI is 14 like you
can see here and when you're trading
high timeframes such as the 4 hour time
frame or daily timeframe that setting is
relevant to that time frame if you're
using lower timeframe such as the
one-hour time frame and theorem 15 or
further down then you're going to need
to adjust that setting accordingly so as
I mentioned earlier the levels of 70 and
the levels 30 are really important to us
because they provide us with an
indication that a trend is either
overbought or oversold however don't
make the mistake of placing a sell every
time the RSI line reaches 70 and don't
make the mistake of placing a buy every
time the RSI line reaches 30 the reason
why is because the RSI indicator has to
be used in conjunction with other
strategy it is not a strategy on its own
and sometimes you may need to use it
with under indicators as well
and I will show you exactly what I mean
so what we've got here is if you just
get my cursor we've got the RSI line
reaching the 70 there the 70 point at
the exactly the same time you can see
that the price is still rising in the
chart so if I move that across the point
at which prices start to fall is the
point at which the RSI line crosses back
under the 70 line so if you are going to
use RSI in this way you need to wait for
the RSI line to cross back down under
the 70 line and the same works in the
other direction so if I just find here
we go if I get my cursor again you can
see that the RSI line has reached the 30
level and prices still keep falling as
soon as the RSI line crosses back over
the 30 line you can see that prices
start rising and if I get my cursor and
you follow that the price chart you can
see the prices keep rising rising and
rising the other way in which we use the
RSI indicator is while looking for
divergence and in simple terms that is
simply when prices and the indicator are
trading in two different directions so
I'll demonstrate that with this example
here so what we've got here are two
highs and I'm going to connect them up
with this line here so we've got high
number 1 and we've got high number 2 and
you can see that high number 2 is above
high number 1 so prices are still going
upwards ok we don't know what's
happening at this stage yet past this
point all we know is that prices are
going upwards at exactly the same time
we can connect highs in the RSI
indicator so we've got high number one
and high number two however you can see
that here high number two is lower than
high number one so by joining them up we
have we can visually see that the price
prices are going upwards but the
indicator is going downwards so despite
the fact that prices are going upwards
the RSI indicator is telling us that the
uptrend is weakening so we place a sell
whatever our strategy is at some point
here and you can
see that prices simply fell and this is
where you can generate quite a lot of
profit the last way in which we can use
the RSI indicator is by focusing on the
50% level so I'm just going to draw a
horizontal line here and just make sure
that this is set dead-on 50% and double
click so we don't move I'm gonna get my
cursor and the reason just so you can
reference the actual prices at the same
time that we are focusing on the 50%
line so in general terms what we've got
here is the RSI line crossing the 50%
level and as I move my mouse on the or
across the RSI line you can see that the
prices are showing us an uptrend so we
are above the 50% line and prices are
still moving upwards now at this point
we're now crossed back down under the
50% line and we have a downtrend in
prices so that is realistically as hard
as that kind of strategy or a way of
working get but what you are going to do
is need to use another indicator such as
the momentum indicator or a whole other
momentum strategy to trade this
appropriately the purpose of showing you
that example is just to show you how the
RSI indicator can be used in the three
ways that we just discussed in this
video so that concludes this lesson if
you do have any questions or comments do
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for the next lesson