Things You Can Learn to Earn From RSI, the Relative Strength Index

What do you know about the indicator or set of indicators that you use when trading Forex

? Have you actually made a list of the things that they tell you about what price is going to do? When was the last time you knew with a better than 70% chance that price was going to go in the direction you predicted and you knew why?

Having been a serious student of RSI, the Relative Strength Index for a number of years I have learned a great deal about how this indicator helps reveal what the future holds.

First, the RSI is a momentum indicator or oscillator. That means it measures the momentum of price over a certain period of time. The default value of most RSIs is 14 periods. Understanding momentum is crucial for traders as it is momentum that provides the directional force when a trade is entered.

Second, RSI measures accurately two kinds of momentum; Momentum Type 1 which is Retracement Momentum and Momentum Type 2 which is Continuation Momentum. This kind of momentum puts you in position to trade Momentum Type 3 which is the "directional force" of the market and is the momentum you need to earn money.

Third, RSI Momentum Types 1 and 2 are signaled by 4 kinds of trading signals called divergences (bullish and bearish) and reversals (bullish and bearish). Depending on the type of trend, these signals determine the momentum set up necessary to be ready for Momentum Type 3.

Fourth, Momentum Type 3 is the momentum that can be located with high probability using statistical data from previous trade signals in particular time and RSI location.

RSI also has what is called a Range Shift when prices change direction and it also trades in an RSI Range when it is trending up and down.

Understanding these principles allows a trader to use on indicator that provides highly accurate trades. One little known fact about multiple indicators is that the only indicator on a trading chart that matters is the one that gives you the most consistent signals. If that is 52% of the time and all the rest are less, than regardless if they are confirming, your best indicator is the 52% indicator. There is only confusion my using the others. That includes trend lines, moving averages, other indicators that monitor price, Fibonacci, Elliott Wave, etc.

Learn to take one indicator and find out everything you can about it until it begins to serve your trading needs. RSI is one of those indicators. I know, as many traders I have taught are now making money.

Things You Can Learn to Earn From RSI, the Relative Strength Index

By: Paul Dean

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