You will see that the signals that RSI provides are also factors that lead to basic mistakes traders make when using this indicator. So what is the method to use RSI effectively?
Remember, J. Welles Wilder invented the RSI as an indicator that measures momentum.
When RSI shows OVERBUY levels, it means the market is trending up. We wait for a moment when the market reverses to the downside, but the problem is that the market can continue to remain in the overbought zone for a long time if it is in a strong uptrend. Opposite in downtrend.
So the OVERBUY and OVERSELL levels are just a sign that the market CAN reverse, but it does not always lead to a reversal.
So to increase trading efficiency with RSI, you need to TRADE WITH THE BIG TREND or COMBINE RSI WITH OTHER TECHNICAL TOOLS.
Specifically, what are the ways to use RSI, let's continue right here...
#first. Multi-timeframe analysis
The trading idea when combining RSI with multi-time frame analysis is to use the RSI indicator to determine the trend on a large time frame, then look for entry points in a smaller time frame according to the trend. identify.
Suppose you trade on the H4 time frame, the larger time frame that needs to determine the trend is the D1 frame.
So the steps will be:
Step 1: Determine trend D1
If on frame D1, the price enters the OVERSOLD zone (RSI < 30) => the market may be about to reverse from DOWN to UP => only look for BUY points on H4.
If on frame D1, the price enters the OVERBUY zone (RSI > 70) => the market may be about to reverse from UP to DOWN => only look for a SELL point on H4.
Step 2: Find the entry point on H4
Find a BUY point: wait for the price to enter the OVERSOLD zone on the H4 frame.
Find the SELL point: wait for the price to enter the OVERBUY zone on the H4 frame.
Let's go into the AUDUSD pair example:
Step 1: Determine trend D1
Observed on frame D1, AUDUSD is decreasing and entering the OVERSOLD zone. We mark the time when the market enters the OVERSOLD zone on D1 as shown and will look for BUY opportunities on the H4 frame.
After the market enters the OVERSOLD zone on frame D1, we find the BUY AUDUSD point on H4 by waiting for the OVERSOLD zone on H4 to appear.
So we will have a BUY point as shown in the picture, which is called multi-timeframe RSI trading.
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