7 min read

The RSI is an effective indicator that is widely used by traders, both novice and experienced. Why is it so popular? Well, first of all is the simplicity of the indicator's design: it's easy to understand once you've learned how to use it. Another advantage of the Relative Strength Index is that it can be combined with many other indicators and allows different approaches and trading strategies to be used. Today we'll look at a combination of the RSI with another momentum indicator, the MACD, as well as a simple moving average for a strategy that works for both short and long time frames.

The Relative Strength Index

The RSI indicator is used to measure the strength of the trend and find potential turning points. It consists of a 14 period baseline and two levels: overbought and oversold. These levels are set at 30 and 70 or 20 and 80, depending on the trader's strategy. Setting the indicator at 20 and 80 is generally considered a more conservative approach. This makes the indicator less sensitive to price fluctuations and could possibly give stronger signals, but it really depends on the trader's preference.

An example of an RSI indicator giving a sell signal

With the RSI indicator, a buy signal is received when the baseline hits or breaks through the oversold level and starts to rise, a sell signal is received when the baseline hits the overbought line and reverses down.

RSI + MMS + MACD

This combination is a trio of one leading indicator and two lagging indicators. The RSI is a leading oscillator, which means it indicates potential future price changes. The simple moving average is a lagging indicator, which follows the trend. RSI indicates possible turning points and MMS helps confirm the signal. The MACD shows the strength of the trend as well as its direction. In this strategy, it is used to confirm the signals of the first two indicators. So how do you read the signals and use these indicators together? Let's take a look at the example below to see them in action.

An example of the 3 indicators giving a buy signal

In this example, the baseline of the RSI indicator is above 50 and going up. The candle chart crosses the MMS line from the bottom and moves above it, and the MACD indicator also gives a buy signal: the blue line crosses the orange line from the bottom and moves downward. high.

A sell signal is received if the candlesticks move below the MMS line, the RSI baseline moves towards the oversold level and the MACD indicator shows red bars with the blue line crossing the orange line down.

Installation and configuration

To apply the three indicators, just find them in the indicators menu on the platform. You can use the search box for that, or find the RSI and MACD in the Momentum section, and moving averages in the Popular section.

In the examples above, all indicators are used with their default settings, however, more experienced traders can change the indicator settings to suit their own needs.

Default settings for RSI

For example, the trader can change the overbought and oversold levels for the RSI, the period for the MMS or the periods for the MACD. However, there is nothing wrong with using the indicators with their default settings.

Conclusion

These three indicators complement each other and, when used together, can provide signals to the trader about trend strength and turning points. However, there is no single indicator or strategy that would guarantee 100% success. Trading is risky and therefore should be treated accordingly. Traders should practice and remember risk management at all times.

Trade now


Source: IQOption blog (blog.iqoption.com) 2020-08-04 12:51:05
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