RSI strategy is popular in many financial markets, including stocks, Forex, gold, and crude oil. Rather than relying solely on the RSI indicator, most RSI strategies are integrated with other indicators such as MA, MACD, and Stochastic. In this article, we will explore two RSI strategies with detailed examples
RSI Trading Strategy
Although RSI was originally developed for stock trading, it has been successfully adapted for other financial markets such as Forex, gold, and crude oil. In fact, across all financial markets that utilize technical analysis, RSI is the most renowned indicator for measuring overbought and oversold conditions.
Many trading strategies have been developed based on RSI, often in conjunction with other indicators, keeping the following basic principles in mind:
When other indicators suggest the same trading signal as RSI at the same time, the signal is reaffirmed and has a better chance of success.
Other indicators are used together to complement RSI, providing additional support when RSI becomes less effective under certain market conditions.
Among these RSI strategies, the MA (Moving Average) RSI strategy and the MACD RSI strategy are two of the most popular. We will explore these two strategies with examples in the Forex, gold, and crude oil markets respectively.
Forex RSI Strategy
RSI can be a highly effective indicator when integrated into Forex trading strategies alongside other indicators. We will explain an MA RSI strategy in Forex trading with an example.
The graph below is an daily chart of EURUSD, six vertical lines marked as numbers 1, 2, 3, 4, 5, and 6 highlight a downtrend from March 2023 to September 2023, where the MA 50 consistently acts as a robust resistance line.
1). MA RSI Strategy
Observing the RSI at these six points where the EURUSD price rebounded against the MA 20, a consistent pattern emerges: RSI rises above the 50 level and subsequently falls below it. Spot 3 is an exception, although RSI still hit the 50 level.
These RSI behaviors confirm a fundamental principle: in a downtrend, traders can seek selling opportunities when RSI moves above the 50 level and then falls below. The convergence of MA and RSI enhances the reliability of these sell signals.
2). RSI Oversold Strategy
There are four oversold areas marked as A, B, C, and D in this Forex chart, each accurately signaling short-term buying opportunities for the rebounds within the downtrend. Therefore, in addition to identifying selling signals, RSI oversold conditions can be used to pinpoint buying opportunities during a downtrend.
Gold RSI Strategy
Similar to Forex trading, RSI is also one of the most popular indicators in gold trading. Gold traders often combine RSI with other indicators to gain better market insights. Here, we will introduce another MA RSI strategy with an example of trading gold.
1). MA on RSI
Instead of adding the Moving Average to the price chart, we draw a 50 MA (the blue line) directly on the RSI itself in the gold daily chart above. During the uptrend from October 31, 2022, to February 2, 2023, it is clear that the 50 MA acted as an effective support line for the RSI.
2). Trading MA RSI
As marked in numbers 1 to 4, the RSI hit and found support on the 50-period MA line four times before breaking down. Based on MA indicator knowledge, buying opportunities presented themselves at spots 3 & 4, which proved to be excellent opportunities.
Just before the RSI breakout, it found support again on the MA line. However, considering the bearish signal where RSI recently retreated from the overbought area back below the 70 level, we do not view this as a buying opportunity. Instead, when the RSI fell below the MA line, it signaled a bearish crossover, indicating a selling opportunity.
Crude Oil RSI Strategy
RSI is also widely used in the technical analysis of crude oil market, in this section we will introduce a MACD RSI strategy with example of WTI Crude Oil.
1). MACD RSI Strategy
Although both are oscillator indicators, MACD and RSI are often used in conjunction. One reason is that while RSI can become less sensitive, particularly when it reaches overbought or oversold levels and the market continues to rise or fall, MACD remains sensitive as it has no limit on its readings. Below is an example from a 4-hour chart of WTI crude oil:
In the uptrend between the two vertical lines, the RSI entered and exited the overbought area several times. Meanwhile, the MACD remained stable and accurately reflected the trend. Combining MACD and RSI in this scenario can effectively filter out the noise generated by RSI.
2). MACD RSI Reaffirm
In the same WTI crude oil chart, a divergence occurred simultaneously at the end of the mentioned uptrend, reaffirming each other’s selling signals. When two or more indicators send the same signal at the same time, traders gain more confidence in their trading decisions.
RSI Strategy Summary
As a momentum oscillator, RSI measures the velocity and magnitude of directional price movements, making it highly responsive to recent market activity. This makes it ideal for combining with other indicators that respond more slowly to market changes, such as MA and MACD, when building an RSI strategy.
While RSI has the limitation of becoming less effective under certain conditions, given its readings are confined between 0 and 100, other indicators without such constraints serve as valuable complements when used together.
