Learn forex – Make Some Free Pips On Me
Developed by Welles Wilder, it is otherwise known as
Wilder’s RSI. The common or suggested setting for this
study is 14 periods. However, I use 2 periods.
The RSI compares the relative strength of the present
price action to the n number of periods that you have
chosen. In a 14 period RSI, the current position of the
RSI will be how strong this period is compared to the
last 14 periods.
So if you were trading on a 1 hr chart, it will compare the
strength of this hour to the last 14 hrs of price action and
give you a number. This will be your current RSI.
Wilder selected 70 and 30 percent levels as overbought
and oversold areas.
When the RSI shows a 70% reading or above, the market
is considered overbought. Expect a reversal to the
downside.
And when RSI reaches 30% or below, the market is
considered oversold. Expect a reversal to the upside.
In my optimized setting, I have settled on the 2 period RSI.
I have back-tested this extensively and this is what I trade
with.
The 2 period RSI is very sensitive to price change but not
jittery. I have compensated for this by devising my own
overbought and oversold levels.
When my 2 period RSI reaches 95%, it is considered
overbought to the upside. You then consider a trade to
the downside.
When it reaches 5% to the downside, it is considered
oversold. You then consider a trade to the upside.
I mark these levels on my chart with a horizontal line
across these levels on the study.
Below is a comparison of the two settings; the suggested
14 period and my optimized 2 period RSI. (Chart available thru email attachment)
This is a 4 hr chart of the GBP/USD. The RSI 2 period is in
green and the 14 period in red.
The 2 period RSI produced 10 signals for profitable
trades while I could only stake my money on 1 for the 14
period RSI.
On the left of the chart where I marked the 14 period RSI
with a blue horizontal arrow, notice how the 14 period RSI
stayed overbought for an extended period while the 2
period RSI was able to give at least 3 profitable signals in
the same time frame.
Also look closely at the chart and see if you can find the
9th and 10th signals from the 2 period RSI.
Can you find them?…….
If you can’t find them, it’s because I have not discussed
the other use that I employ the RSI for.
Please Take The Following Action Steps
- Pull up a chart of a forex pair you will like to trade
- Plot both my RSI 2 periods and the 14 period RSI, one on top of the other.
- Set the levels as you learned in the forex lesson and compare the two signals.