RSI: An introduction to the oscillator (for professionals)


Today we will go over some characteristics of the RSI oscillator and methods of its professional adjustment. You can get a general idea of this indicator here. Just like for any oscillator, there are several general principles, which people should keep in mind when configuring the RSI:

  1. The movement of the indicator graph to the standard zone (above 70% / below 30%) is not a signal for a reversal! This is a warning that the trend reversal will begin soon.
  2. The farther the indicator goes into the zone (above 70% / below 30%), the more likely the trend reversal is.
  3. Having analyzed the history of the asset, you can apply the rule of local patterns: if the trend has reversed many times at the same percentage of RSI, you can assume another trend reversal just as it returns to the same rate again.

It should be noted that the standard settings of the RSI zones (30% and 70%) are universal. At the same time, they can be changed to improve the work of the indicator. There are two ways to do this:

Method I


According to point 2, you can “narrow” the overbought / oversold zones for all assets. For example, use not 70/30, but 73/27, 75/25, etc. In this case, the quantity will become quality. That is, the narrower the zones, the fewer the signals from the indicator we get. And the fewer signals we get, the better their quality is.

To configure the indicator on Olymp Trade platform, you should choose a separate “Technical Analysis” window (the screenshot shows how to set the indicator for the AUD/USD asset).

We will tell you about the second and more advanced way to configure the RSI indicator, in the next article. Stay tuned and follow our updates!

Method II


According to point 3, one can configure the indicator even more precisely for a specific asset. For example, let’s look at the AUD/USD asset at 5-minute candlesticks for two trading days.

Using the local patterns (which are the trend reversals that have already taken place), we move the indicator zone by the local maximum number of reversals, just like when dealing with the support / resistance level. In our example, the oversold zone will remain at 30% (the default value). Let’s define the levels of the zones. The level of zone 1 is the locally configured zone start (which is 30% in the given example). We define the level of zone 2 in the same way as we determine the levels that are constructed automatically, using the day’s peak values.

These will be the peak values of the indicator in each of the zones, respectively. To indicate them, you can use the horizontal line tool. In our example, it will be 24%, which is the red bottom line.

Configure the levels of overbought zones in the same way. Locally, they will be 66% and 75%. The trading principle is: if the trend reversal does not start at the level of zone 1, it is necessary to wait until it approaches the level of zone 2 to receive a one-touch signal and not to trade the reversal in the gap between them.

Recommendations


Do not set the levels of zone 1 below 60% and above 40%, because that picture most likely indicates a low volatility of the asset, and it is not recommended to trade it.

One should also remember that such setting of the RSI indicator will be unique for each asset and the time frame of the candlesticks. In addition, it requires constant adjustment (at least once a day or in case of breakout of peak values of zones 2).

It is recommended to determine four zone levels for each asset before you start trading in a separate window of technical analysis at 5-minute candlesticks and scale the chart to two trading days.

If you use other timeframes of the candlesticks for analysis and trade, you need to bear in mind that if the timeframe is changed, the RSI will be reconstructed, which will cause the reconstruction of the zones. You can write out the current values of the zones for the assets so that they can always be in front of your eyes for ease of reference when trading.


Risk warning:

The information provided does not constitute a recommendation to carry out transactions. When using this information, you are solely responsible for your decisions and assume all risks associated with the financial result of such transactions.

Start trading