The Relative Strength Indicator, A Money Making Forex Trading Indicator

Would you like to use an indicator that is used by much of the Forex trading industry

? The same indicator that is heavily used by most of the leading industry traders who drive the markets each day including banks and hedge funds? What is that indicator and if you knew what it was would you know how to use it to make money?

Many traders use RSI, the Relative Strength Index to measure momentum in the Forex market. Here is a comment from Matthew Clements, editor of The Technical Analyst magazine. "The Relative Strength Index (RSI) is perhaps the most popular of all technical oscillators, in that it provides an easy-to interpret indication of possible market turning points and trend strength."

Welles Wilder created RSI, which is defined as a momentum indicator that measures the market's current price relative to the price for a certain period of time, typically 14 periods.

Many traders use the indicator to determine whether price at a particular location is overbought or oversold. This however was never the intention of Welles Wilder. Still, this seems to be the predominate use of RSI, the Relative Strength Index.

Unfortunately traders who have used the concept of overbought and oversold to enter and exit the market have probably had varied if not unsuccessful results. Overbought and oversold are relative terms and a close following of RSI and other indicators that use such language will quickly show traders who try to use it the fallacy of this thinking.

Overbought and oversold are very simple to disprove. Place a horizontal line on your RSI chart at 70 RSI which is considered overbought. Now scroll back through prices and notice how long RSI can stay at the level and when it falls below that level to even 30 RSI, (considered oversold), price can still be moving up. The same experiment can be done for oversold conditions.

Wilder's methodology was more centered around divergence between RSI and price, in particular after what he called a, " . . . good directional move" which was in his mind, "a very strong indication that a turning point is near." The problem with this is that "good" and "very strong" are relative in the minds of traders and in price in general. More specifics would need to be put in place. Divergence is certainly another concept that relates strongly to trading and to RSI, however, divergence can be shown to be a statistically inconsistent method of entering the market.

To make money using RSI a trader will need to educate themselves to the proper uses of the indicator which are not divergence signals but reversal signals. These signals combined with statistical data that surrounds their success in certain market conditions will provide the trading edge that the Forex trader needs to beat the market. Making money in any financial market is difficult however with the right tools and the correct information Forex traders can create an edge that will consistently make them money in the investment market.

by: Paul Dean

POST COMMENT

Forex ShockWave Review-Is It Worth The top mistakes made in Forex Trading The Forex Forum: What's In It For You? Forex Trading With Atlantic Fx 10 Major Factors Which are Preventing You From Rewarding Foreign Currency Trading Forex Economy A Forex Trading Guide How You Can Finally Succeed Trading Forex With The Forex Signals Forex Signalman Review Some Basic Things You Need To Know About Forex Trading All About Stopping Forex Trading Forex Trading And The Three Steps To Financial Success forex trading systems