The Relative Strength Index, simply called RSI is an important Oscillator indicator that forex traders can use to make great pips from the forex market.
The RSI is a free indicator that you can easily locate in your mt4 platform by clicking on Insert >> Indicators >> Oscillators >> Relative Strength Index. On selecting the indicator, just click OK, leaving it on default which is the recommended settings for use of this indicator.
The RSI should look like this on your mt4 chart on successful installation
The RSI usually attach itself below the currency pair chart. The important components of this indicator are the RSI line, the 30 and 70 period marks which indicate oversold and overbought conditions respectively,
The RSI works best on trending marketing and its major use is to know oversold or overbought conditions.
Currency pairs in Forex usually form trends every time, and its very important for you to know when a trend is about to end in order to give rise to another trend formation.
The RSI helps us know when a particular dominant trend may have lost its buying/selling momentum; the indicator achieves this whenever the RSI line crosses the the 30 or 70 period.
These periods are very important as it tells us of extreme conditions in the market.
The 30 period mark below indicate oversold condition, when the RSI crosses below this line, it indicates that the selling trend may soon be exhausted, thereby allowing the buyers to take over. This signal indicate a time to buy, especially if the RSI then move above the 30 period indicating that the market is on the rise.
The opposite applies for the 70 period mark. When the market have been bullish for some time, and to the extent that the RSI crosses above the 70 period mark, this indicate overbought conditions. Meaning that the buying trend may soon be over, allow the sellers to take over. Once the RSI then falls again below the 70 period mark, this signal indicates a time to sell as the market should start forming a selling trend.
As always, its not good enough to rely on only one indicator in Forex trading, it would be very helpful to use the RSI with other indicators in order to confirm the signals generated by both indicators.
Moreso, make sure you set your Take profit & Stop loss when placing any trade in Forex, in order to protect your capital in the case the market moves against you.