Forex Trading Basics – Relative Strength Index (RSI) Indicator

Introduction:

Many readers are used to me talking about Hodo Global and how you can make money trading currencies by utilizing them. However, I am now adding a series on basic trading tools for those who are also interested in learning to trade on their own. Most people who venture out on their own lose money. So, I would use a system like the RYZE.Ai artificial intelligence trading algorithm as a starting point while learning the skills necessary to consider trading. In this vein, I have started with a basic indicator, the rSI.

What is the Relative Strength Index (RSI)?

rsi-example

EURUSDM15 RSI Example

The Relative Strength Index is a technical momentum indicator. Today we will cover the basics of the Relative Strength Index to make you familiar with this type of indicator. The RSI is a momentum indicator and also an oscillator that indicates overbought or oversold conditions in the market. It is important that you understand the basics in order to begin to learn trading skills, if that is your goal..

The RSI compares the magnitude of recent price rises to recent price falls to try to determine overbought and oversold market conditions. When we say a market is overbought what do we mean? Basically this means that the price has risen usually accompanied by high volume to a point where an oscillator has reached its upper bound. The most common boundaries are set at 70/30 or 80/20 for the RSI. Depending upon the currency pair or whatever you are looking at, you can see what level works the best.

It is important to note that the RSI indicator and the others discussed in this series of articles does not only apply to Forex trading. These same concepts and indicators are used to trade stocks, stock indexes, futures, commodities, and options. This basic trading knowledge will serve you well whatever and wherever you trade.

RSI Formula:

RSI = 100 – (100/(1 + RS) where RS is the Relative Strength

RS = the Average of X periods of up closes (as compared to previous period) / the Average of X periods of down closes

Below, I have a chart of the hourly EURUSD currency pair with the RSI indicator applied. Again, I have not optimized it for this currency pair, I just used the default settings.

I have drawn lines in red to indicate points where you would sell and in blue to indicate buys. There are many nuances that can determine exact trade entries but this is a good basic example for you to understand the RSI oscillator concept.

Hourly EURUSD Chart with RSI:

RSI-Example

RSI Indicator


For those of you who would like to read more, I have found this to be a good book on the RSI and a few other common indicators:

Click here for more on this book.

Example using the Hourly EURUSD Chart

Trade Example:

What does this mean in terms of trading profit?

In Forex quotes usually a Pip is the 4th place to the right of the decimal point. If you are trading a mini lot a pip would be worth $1.

I have picked one trade from the chart above and it is shown in the chart below:

EURUSD RSI Indicator Trade Example:

rsi-trade-example

EURUSDH1 RSI Trade Example

This is an example to teach the basics. I did not delve into stop losses or risk. In an actual trade these factors have to be considered and it is possible we would not have held the entire time, but for a basic example of the RSI, this is fine.

Profit Potential:

In the trade above the entry looks to be around a price of 1.09510. When the next buy signal is generated and thus you would exit the sell, the price looks to be around 1.08070. Do the subtraction, 1.09510 – 1.08070 = 144. So, in this example the profit would be 144 pips. Making the assumption that we were trading a mini lot, a pip is worth $1. This would translate into a profit on the trade of $144.

This means if you had a standard account with a broker and had the minimum $2,000 for a standard account in about 20 hours or lets say a day you increased your account by $144. If you do the math, $144/$2,000 =.072 or 7.2%.

In one trade in one day a profit of 7.2% could have been realized. This is why people like to trade Forex. There are extraordinary opportunities. However, people need to be very careful as there are also risks. People who don’t know what they are doing and perhaps bought some “magic” trading system and watched a couple hours of videos (as I have seen advertised) and then are turned loose to trade are probably going to lose. You may have a few profitable trades first, but you are probably doomed to lose.

I recommend a different approach with extensive training and mentoring and an earn while you learn approach. Starting with having an account linked to RYZE.ai, the fully automated, hands free program that uses an artificial intelligence algorithm to trade using strategies not usually available to small traders. This is the earn while you learn part. Then study, study, study. Learn trade setups, risk management, trade entries and exits, stop losses and profit targets. You can eventually, when comfortable, trade in a practice and eventually open a small account and trade micro lots. This is a fantastic way to learn. You get to see what happens when trades go right and what to do when they don’t work out as planned. You are not going to risk a large account or trade larger lots. Learn, learn, learn all the wile RYZE.Ai is earning for you. You make decide to also trade on your own or you may decide to leave the trading to RYZE.Ai and focus on other endeavors.

Conclusion:

I hope this RSI introduction has been educational and informative. If you have any comments or questions, please leave them in the comments section below or you can email me at Xin@FXTradingIncome.com .

Are you ready to learn more about RYZE.Ai and Hodo Global? If so, click here.

Find out how you can make money with RYZE.Ai. Also feel free to drop me an email with your phone or Skype and we can discuss questions in person.

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Sincerely,

Xin

Zin Zhang - Hodo Global

Zin Zhang – Hodo Global

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