The Relative Strength Indicator, created by Wel les Wi lder, has long been used by many market participants in their ana lysis . For the most part this appl ication has been appl ied via dai ly charts , or longer periods , primari ly as a means to identif y trend. But there are a number of methods that R SI can be used for;

• As a measure of anoverboug ht/oversold situation.

• An indicator of theunderly ing trend & of trend brea ks .

• A buy/sel l signa l when the50% l ine is crossed.

• An indicator of possibleDivergence

For the investor or proprietar y trader these methods are without doubt tools that , takenin context with other technica lindicators , wi l l prove useful .But do theywork, and can theybe successf u l ly employed, in shorter intraday time frames?

In this article I wi l l use thesame hourly GBPUSD chart , and the same 8 period R SI, and apply the four methods above to i l lustrate how to use them andassess whether they’re l ikely tobe benef icia l . Last ly I ’ l l adda lesser known but powerful

Using RSI as an intraday tool

Chart 1. RSI Overbought/Oversold

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FXTECHNICAL ANALYSIS

approach that I f i nd i nva luable i n a ssessi ng l i kely i ntraday pr ice act ion.

RSI OVERBOUGHT/OVERSOLD

T h is technique i s qu ite stra ightforward in thatoversold read ings , i .e below25% , a re used a s a ler ts that the ma rket i s r ipe for a cha nge of d irection to posit ive . T he sa me appl ies to overboug ht ind ications – in other wordswhen RSI reg isters above 75%then the potentia l a r ises for a downwardmove .

Obv iously i n such ci rcu msta nces conf irmation i s needed i n the shape of ca nd le formations that prov ide c lea r bu l l i sh/bea r ish sig na ls .

As you can see from the abovechart where overbought ismarked by red shading and oversold by blue , it’s a bit ofmi xed bag. The sig nif icant highs/lowsarenatura l lymarkedby the relevant shading but a

numberofothersituationswereonly warnings of what turns outto be minor profit taking ral lies inside the more pronounced trend.

RSI TREND INDICATOR & BREAKS

This is an interesting wayof using R SI price action as opposed to the actua l R SI reading. The l ine movement of the indicator is used in the same way as the price action– i .e .to draw trendl ines fromsig nif icant pea ks or troug hs as an indication of trend. W hen the trend l ine is broken the direction of movement changes .

There are , perhaps, a number of other less pronounced trends

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TECHNICAL ANALYSISFX

Chart 2. R SI Trend Indicator & Breaks

Chart 3. RSI 50% Line

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FXTECHNICAL ANALYSIS

I could have used on this example but I ’ve highl ighted 3clear instances . In each of the cases above whi le the trends onthe spot price and the R SI are almost mirror images, the break of the R SI l ine is marg ina l ly a head of the spot price breach. Interesting ly, and whi le notexclusively, it rarely lags by a noteworthydegree .

RSI 50% LINE

The element here is that the 50% marker on the R SI reading is pivota l . In other words acrossing of that point upwardis indicative of a bul l ish trend whi lea‘negative’ crossconf irmsa bearish bias .

Stepping back from the red

marking , that show eachcrossover, you can see that the underly ing tone of the market is ref lected by the fact that R SI is above/below the 50% l ine .Howeveras a tooltoBuy/Sel l onmoves throug h the l ine it clearly

is worse than any of the othermethods with volati le movescreating fa lse brea ks too much of the time for the indicator to be any thing other than worthless for actua l trading(thoug h not for an appreciation of a key backg round element to market psycholog y).

RSI DIVERGENCE

Look ing for an indication of divergence is a more interpretive , rather than mechanica l , method. W hat we’relookingforis a lowerpricelowbutwhereRSIreadingsmovehig her, contradicting the spot movement rather than matching it , or a higher price high wherethe RSI reading is lower on the2nd occasion.

Chart 4. RSI Divergence

Chart 5. Moving Avarage of RSI

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In this same example , covering only a l imited period of time, there are 5 examples . A l l threebul l ish divergences and both bearish divergences proved correct , predicting a change in direction for GBPUSD. The mainissuewiththis styleofRSIsig na ls is that ver y of ten it is subjective and confirmation can be g iven too late for sig nif icant returns .

W hat can be clearly seen in the above examples is that experienced use of the R SI indicatorcanbearewardingtoolfor even shor t t er m t r a d i n g . But le t ’s move on to the 5tha ppl ic a t ion t h a t I ment ione d a t t he s t a r t of t h i s pie c e ;

MOVING AVERAGE OF RSI

Here t he R S I i s a d a pt e d by over l ay i n g a mov i n g aver a g e of t he a c t u a l R S I re a d i n g s r a t her t h a n of t he s p ot pr ic e s . T he c ro s s of t he R S I a b ove or be low the mov ing avera geg i v i n g a bu y or s e l l t r i g g er . T he mov i n g aver a g e u s e d here i s a s i mple one of 21 p er io d s but , c r uc i a l l y, d i s pl a c e d /of f s e t by 13 per iod s . A s I ’ve ment ionedi n a pre v iou s a r t ic le of F X Tr a d er M a g a z i ne ( Ja nu a r y-M a rc h 2 012), t he d i s pl a c e d mov i n g aver a g e h a s t he a bi l i t y

to f i l t er out a g re a t d e a l of noi s e a nd g re a t l y en h a nc e s t he e f f ic ienc y of t he to ol .

You c a n s e e a b ove t here a re 8 t r i g g er s a nd a l l but 2 g i ve s i gn i f icant fo l low th rougha nd on l y one c a n b e re g a rd e d a s g i v i n g a n i nc or re c t s i g n a l – t he c or re c t s e l l s i g n a l b e i n g g iven a f ew hours l a ter . Iti s c le a r t h a t t h i s t e c h n iq ue of a d a pt i n g R S I to i nt r a d ay t r a d i n g c a n b e of s u b s t a nt i a l use . Now we ’ l l u se anothercu r renc y pa i r and d r i l l downto a s hor t er t i me f r a me ;

Thi s nex t cha r t shows 15 minEURUSD wh ich i s about thelowest t ime f rame I f ee l g ive sa p er s p e c t i ve to t r a d e a t rend i n s id e t he d ay.

I n t h i s e x a mple t here a re 6

t r i g g er s a nd on l y t he 2 nd a nd 6 t h d id not prov id e opp or t u n it ie s f or a prof it a ble t r a d e (t he 6 t h a c t u a l l y re s u lt e d i n a s ideways move that wou lde vent u a l l y h ave b e en c lo s e d f or l i t t le move ment) . T he s hor t er t i me f r a me you a dopt t he g re a t er t he s c op e f or a l a ck of d i rec t ion whether i nq u ie t t r a d i n g or vol a t i le pr ic e ac t ion , however th i s manner ofu s i n g a mov i n g aver a g e of R S I re a d i n g s c ont i nue s to prov id e buy and s e l l t r i g ger s w ith ag o o d p erc ent a g e of move s t h a t g i ve s i g n i f ic a nt p ot ent i a l f or prof it a bi l i t y.

I hop e t h i s a r t ic le prov id e s you with g rounds for thought anda n i nt ere s t i n t r y i n g i nt r a d ay R S I s i g n a l s f or you r s e l f .

Alan Collins

TECHNICAL ANALYSISFX

Chart 6. EURUSD 15 min