Stochastic RSI

Technical analisys Stochastic RSI

There are hundreds of indicators available for Forex traders to use at their disposal. Doing a simple forex trading indicator web search through Google instantly provides more than 5 million results for traders to choose from. With the reality that our trading indicator options could be overwhelming, we, as strategic traders, must stop and take a step back to identify exactly what we aim to get out of using indicators. For a number of currency traders, the goal of utilizing any trading indicator is to improve accuracy and ease of market technical analysis when plotting our next winning trade.

When the time arrives to choose which indicator (or which set of indicators) works best for you, one of the most basic, easy-to-follow indicators, referred to as the Stochastic RSI trading indicator, comes to mind. Leonardo da Vinci once stated, “Simplicity is the ultimate sophistication.” The Stochastic RSI is where simplicity meets sophistication in many respects. This indicator doesn’t have a lot of moving parts involved with it when you compare it to other indicators that might have several moving parts involved in its use. 

In applying this indicator to your charts, there are really only two basic components that you should be aware of before you begin utilizing this indicator. The first component is being able to identify the indicator’s current location on the chart (in regards to market level) that you’re looking at to guide your future trading decisions. This location could be easily identified by opening the chart of your choice, applying the indicator, and looking for the point-at-present for the indicator’s position in relation to current market prices and buying/selling levels as we will discuss in detail later. Secondly, you will want to use this information to identify the optimal entry point and time when the most money-making opportunity exists. Let me explain how this works.

How The Indicator Works

Stochastic RSI stands for Stochastic Relative Strength Index. The Stochastic RSI takes the chart movements over time and measures out the speed and momentum behind the incessantly shifting price movements. The indicator oscillates between two zones or levels. The first level is the overbought level, which typically lies within the 70 percent or above zone that the indicator identifies on the chart. Reaching this market level tells traders that, based upon the market’s history, the currency appears to be overvalued at present. This could lead traders to prepare for a potential short-term pullback in the market. If a trader is currently trading in the direction of the trend, it might be wise to strategically place exit points before the predicted u-turn point in an attempt to protect their accrued profit in the event that the indicator’s predicted pullback occurs. The other level deals with the oversold zone which typically begins at or directly below the 30 percent level. As you might be able to guess, if the indicator states that the market is currently approaching or within the oversold zone for that particular currency pair, then traders might expect that the base currency is being undervalued below its true worth and therefore a short-term rally (or a bullish turn) might be in the near future. Likewise, this information might also help traders either take protective action to ensure that the profit in their open trades is protected or, to the opposite effect of this, the trader might then decide to plan their next trade for when the market reversal takes place.