An effective way to use RSI trendlines!

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An effective way to use RSI trendlines!

In this article i want to share with you an effective way to use RSI trendlines to trade with the trend or a reversal. You already know from my previous articles that I use RSI to identify an overbought or an oversold condition. We will use again RSI for this job but now I am going to saw you how to draw simply and fast trendlines in RSI to have an extra confirmation and confidence for your online binary option trades.

Let’s go to the first screenshot. It’s from EUR/USD currency pair.

As you can see in this chart we don’t have many indicators, only our 8 period RSI for confirmation,it’s almost naked trading. Now, look at the screenshot.We have two red horizontal lines from previous supports which create a support area in this spot.When the price comes closer to this spot we should wait for a reversal.If you are a short-term trader the entry is very important, so many traders asking which is the right one. Should we wait for the price to hit the first red horizontal line?Maybe the second? We can use RSI trendlines for this reason. Look at the RSI. I drew a red trendline. As you can see the value in RSI makes lower- highs. We have a high in the beginning of the trendline, after that the value is moving down and makes a new high lower than the previous. The only thing we have to do is to connect the highs(high and lower-high) and our trendline is ready. Now, notice the behavior of the price and the behavior of the value in our 8 period RSI indicator.They agree so we don’t have a divergance. Notice that the value in RSI every time it hit the trendline makes bounces.The trendline acts as a resistance.Look at the call arrow in the screenshot. It’s the spot I took a call trade.The price hit a support level, as I said before and in this candle notice that the value in our RSI breaks the trendline. This is a reversal signal.

Let’s see more examples.

In the second screenshot we have again lower-highs of the value in our RSI and a support area in the chart, so we take a call. In the third screenhot we have the opposite condition. Look at the chart, we have a resistance in the red horizontal line and our RSI makes higher-lows, a sign that that the price is moving up now. When the price hit the resistance (the red horizontal line) notice the behavior of our indicator. The value breaks the trendline in the blue box. This is our confirmation and we take a put in this case.

You shouldn’t chase the trades, let them come to you. RSI is an indicator and just follow the price. You should be patient and wait for a clear break of the trendline. Maybe sometimes, you should wait to see how the first candle acts after the reversal and after that take your trade. Don’t forget overbought/oversold areas.

RSI Trendline Strategy – an Effective Reversal Strategy

The RSI Trendline Strategy is essentially a reversal strategy and it makes use of the RSI indicator in an unconventional way. The Relative Strength Index (RSI) indicator was developed by J. Welles Wilder and it’s a momentum oscillator that measures the speed and change of price movement. The RSI oscillates between 0 and 100 and it’s often used to measure overbought and oversold conditions in the market, divergence or it can be used to identify the general trend. Basically, the RSI is analyzing the total number of down periods versus the total number of up periods and plots the average on the RSI curve. There are many different techniques for using it, but it can be altered depending on each trader’s needs.

RSI Trendline Strategy Setting

According to Wilder the default RSI settings should be 14 periods, but in our proposed strategy we’re going to use the 20 periods as our RSI settings. The reason why we’re going to use the 20 periods is because 20 is multiple of 200 periods, and the 200 periods carries a big influence and it’s a big psychological number often used by the smart money to define an uptrend or a downtrend. We don’t want to use a bigger period because it can signal the beginning of a new trend too late, but we neither want to use a faster period because it can generate a lot of false signals.

We use the RSI indicator to show us if the prevailing trend has ended and a new trend is underway, but as stated above, we’re not going to measure the overbought/oversold conditions or as a crossover system, we’re going to take it one step further and look for a break in momentum of the prevailing trend. What I mean by this is that we’re going to look at the changes in prices relative to the changes in the peak and the valley that the RSI indicator will generate.

RSI Trendline Strategy

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As the above chart suggests the RSI-Trendline strategy works best on the 1 hour time frame but with its applicability can be used on any time frame. The rules of the system are straightforward, we only need to connect the most recent RSI peaks or valleys with a trendline and a breakout of the TL will warn us that the market has lost its steam and the prevailing trend has lost its momentum.

There is one more condition that needs to be satisfied in order to enter a trade, we need for the price to still be trading below its trendline, so we’ll need the RSI trendline to be broken, but the price to still be trading below its trendline. This is the most important principle in order for the RSI-Trendline strategy to work because it tells us there is also a divergence between momentum and price. Momentum always goes ahead of price and that’s the reason why this strategy can yield a great return.

RSI Trendline Strategy – Sell Setup

In the above chart, we can have a representation of how a short setup would look like. In terms of stop loss level, we’re always going to use the candle on which the RSI broke its trendline, so in the case of our short setup our SL would be above that candle. In terms of profit target, we’re going to use the RSI again and wait until it’s changing momentum in the opposite direction.

How to Use RSI (Relative Strength Index)

Relative Strength Index, or RSI, is a popular indicator developed by a technical analyst named J. Welles Wilder, that help traders evaluate the strength of the current market.

RSI is similar to Stochastic in that it identifies overbought and oversold conditions in the market.

Typically, readings of 30 or lower indicate oversold market conditions and an increase in the possibility of price strengthening (going up).

Some traders interpret that an oversold currency pair is an indication that the falling trend is likely to reverse, which means it’s an opportunity to buy.

Readings of 70 or higher indicate overbought conditions and an increase in the possibility of price weakening (going down).

Some traders interpret that an overbought currency pair is an indication that the rising trend is likely to reverse, which means it’s an opportunity to sell.

In addition to the overbought and oversold indicators mentioned above, traders who use the Relative Strength Index (RSI) indicator also look for centerline crossovers.

A movement from below the centerline (50) to above indicates a rising trend.

A rising centerline crossover occurs when the RSI value crosses ABOVE the 50 line on the scale, moving towards the 70 line. This indicates the market trend is increasing in strength, and is seen as a bullish signal until the RSI approaches the 70 line.

A movement from above the centerline (50) to below indicates a falling trend.

A falling centerline crossover occurs when the RSI value crosses BELOW the 50 line on the scale, moving towards the 30 line. This indicates the market trend is weakening in strength, and is seen as a bearish signal until the RSI approaches the 30 line.

How to Trade Using RSI

RSI can be used just like the Stochastic indicator.

We can use it to pick potential tops and bottoms depending on whether the market is overbought or oversold.

Below is a 4-hour chart of EUR/USD.

EUR/USD had been dropping the week, falling about 400 pips over the course of two weeks.

However, RSI dropped below 30, signaling that there might be no more sellers left in the market and that the move could be over.

Price then reversed and headed back up over the next couple of weeks.

Determining the Trend using RSI

If you think a trend is forming, take a quick look at the RSI and look at whether it is above or below 50.

If you are looking at a possible UPTREND, then make sure the RSI is above 50.

If you are looking at a possible DOWNTREND, then make sure the RSI is below 50.

At the beginning of the chart above, we can see that a possible downtrend was forming.

To avoid fakeouts, we can wait for RSI to cross below 50 to confirm our trend.

Sure enough, as RSI passes below 50, it is a good confirmation that a downtrend has actually formed.

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