Forex Trading Using the RSI and Stochastics

The Relative Strength Index (RSI) and the Stochastics oscillator are two of the most commonly used indicators on most trading charts. These two popular indicators can be used with a pair of Moving Averages to offer a straightforward, yet effective system for finding beneficial trades.

We know the RSI is a momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to establish overbought and oversold conditions of a security. The RSI crosses over a 50% line showing a positive or negative bias. A reading greater than 70 is approaching overbought; while a reading beneath 30 is reaching oversold. Customary setting for the RSI is 14.

The Stochastic oscillator is a time-honored old acquaintance to all technical traders. It is a technical momentum indicator that compares a security's closing price to its price range over a given time frame. The oscillator's sensitivity to market movements can be reduced by adjusting the time period or by taking a moving average of the result. It has a range of 0 to 100. A reading beneath 20 is regarded as oversold; while a reading over 80 is regarded as overbought. Typical setting for the Stochastics oscillator is 14,3,3.

Now, let's combine these two indicators with two Exponential Moving Averages (EMAs). An EMA differs from a Simple Moving Average in that higher weight is given to the more recent data when figuring the average and therefore is considered a more correct, more timely indicator. When all these are pointing in the same direction, we come up with a set-up for a trade where the odds are heavily in the trader's favor.

This is a bit tough to make clear without the assistance of graphics. If you're familiar with how these indicators perform, it should be manageable. You can always visit our site for a complete discussion with charts.