| Developed by the technical analysis pioneer, J. Welles | | | | This stop loss strategy minimizes the risk and allows |
| Wilder, the Relative Strength Index is one of the | | | | a great risk:reward ratio. |
| most powerful and precise technical indicators. It is | | | | Another trading strategy that involves the Relative |
| useful both in generating overbought-oversold signals, | | | | Strength Index is a trend-following one. It is easier to |
| and in showing trend power. In this article you will | | | | trade and gives more signals, but its signals are |
| learn how to trade FOREX with the Relative Strength | | | | weaker and win rate is lower. For trend-following |
| Index. | | | | traders, it will be a powerful trading signal. The main |
| The Relative Strength Index is calculated through | | | | basis of this system is a cross of the middle line. |
| comparing the gains and losses in a stock or currency | | | | When the RSI crosses the 50 level from below, a |
| pair, and identifying periods in which the security is | | | | long signal is issued. When the RSI crosses the 50 |
| overbought or oversold. Overbought periods indicate | | | | level from above, a short signal is issued. When |
| that the price is too high and therefore a bearish | | | | trading this method, the trader is always on the |
| retracement is expected. Oversold periods indicate | | | | market, either long or short. The stop loss |
| that price is too low and therefore a bullish | | | | mechanism presented earlier is not useful anymore, |
| retracement is expected. The Relative Strength | | | | as the trades are not reversal trades but |
| Index oscillates in values from 0 to 100, when the | | | | trend-following trades, and upswings and downswings |
| level of 80 and above is the overbought level, and 20 | | | | are very far from entry price. This trading method is |
| and below is the oversold level. | | | | profitable mainly in trending markets and generally |
| Trading overbought and oversold levels is done when | | | | weak in ranging markets. |
| these levels are crossed. A cross of the overbought | | | | In conclusion, the Relative Strength Index is a |
| (80) level from above indicate a bearish signal, and a | | | | powerful indicator in any trader's arsenal. Whether |
| cross of the oversold (20) level from below is a | | | | you are a trend-follower or a reversal trader, you will |
| bullish signal. When trading, it is recommended to | | | | find its signals highly insightful and profitable. It is one |
| place the stop loss above the upswing (for short | | | | indicator that is definitely worth its reputation. |
| trades) or below the downswing (for long trades). | | | | |