The Relative Strength Index (RSI) is a popular forex indicator for conducting technical analysis. It is used by forex traders to spot potentially overbought or oversold currency pairs along with divergence to determine the trend direction. However, trading with the RSI can generate lots of false signals if trades are not filtered accordingly. In this guide, I will take look at a simple 2 period RSI strategy to help you get the most out of the indicator on all of your favourite currency pairs and chart timeframes.
What is the 2 Period RSI Indicator?
The 2 Period Relative Strength Index (RSI) is a technical indicator used in trading to measure the strength of a security’s price action. It is calculated using the following formula:
RSI = 100 – (100 / (1 + (average gain / average loss)))
The RSI oscillates between 0 and 100, and is considered overbought when above 70 and oversold when below 30. A 2 period RSI strategy involves using a 2 period RSI as a trading indicator to make buy and sell decisions.
2 Period RSI Strategy
The 2 period RSI strategy is a technical trading strategy that uses the Relative Strength Index (RSI) indicator to generate buy and sell signals. Here are three key points to describe the strategy:
- The RSI is a momentum indicator that measures the strength of a security’s price action. It oscillates between 0 and 100, and is considered overbought when above 70 and oversold when below 30.
- The 2 period RSI strategy involves setting the RSI indicator to a 2 period setting and using the resulting RSI values to generate buy and sell signals. A buy signal is generated when the RSI crosses above 30, indicating that the security may be oversold. A sell signal is generated when the RSI crosses below 70, indicating that the security may be overbought.
- The 2 period RSI strategy is just one of many indicators that traders can use, and it should not be used in isolation. It is also important to use proper risk management techniques and to backtest any trading strategy before using it in live trading.
Buy Signal
- RSI value: A buy signal is generated when the RSI crosses above 30, indicating that the security may be oversold. This means that the trader should consider buying the security when the RSI is above 30.
- Trend: It is generally advisable to buy when the security is in an uptrend, as this indicates that the price is likely to continue moving higher. The 2 period RSI can be used to confirm the uptrend by showing that the security is not oversold.
- Other technical indicators: The 2 period RSI should be used in conjunction with other technical indicators to get a more comprehensive picture of the security’s price action. For example, the Moving Average Convergence Divergence (MACD) indicator or the Moving Average (MA) indicator could be used to confirm the uptrend.
Sell Signal
- RSI value: A sell signal is generated when the RSI crosses below 70, indicating that the security may be overbought. This means that the trader should consider selling the security when the RSI is below 70.
- Trend: It is generally advisable to sell when the security is in a downtrend, as this indicates that the price is likely to continue moving lower. The 2 period RSI can be used to confirm the downtrend by showing that the security is not overbought.
- Other technical indicators: The 2 period RSI should be used in conjunction with other technical indicators to get a more comprehensive picture of the security’s price action. For example, the Moving Average Convergence Divergence (MACD) indicator or the Moving Average (MA) indicator could be used to confirm the downtrend.
2 Period RSI Pros & Cons
Pros
- Simple to use: The 2 period RSI strategy is relatively simple to implement and understand, making it a good choice for traders who are new to technical analysis.
- Quick to react: The 2 period RSI uses a short-term time frame, which means that it can react quickly to changes in the market. This can be beneficial for traders who want to enter and exit trades quickly.
- Ability to identify divergences: A 2-period RSI can help traders identify divergences between the security’s price action and the RSI, which may be a sign of a potential trend reversal.
Cons
- Sensitivity to noise: A 2-period RSI may be more sensitive to short-term fluctuations in price, which can lead to more false signals.
- Lack of trend identification: The RSI is primarily used to identify overbought and oversold conditions, but it may not be as effective at identifying long-term trends.
- Limited historical data: A 2-period RSI is based on a very short time frame, so it may not be as reliable when applied to longer-term chart patterns or historical data.
- Limited utility in sideways markets: The RSI is most useful in trending markets, so it may not be as effective in sideways or range-bound markets.
Conclusion
The 2 period RSI strategy is a technical trading strategy that uses the Relative Strength Index (RSI) indicator to generate buy and sell signals. The strategy involves setting the RSI to a 2 period setting and using the resulting values to make trading decisions. A buy signal is generated when the RSI crosses above 30, and a sell signal is generated when the RSI crosses below 70. While the 2 period RSI strategy has the potential to identify overbought and oversold conditions and may be simple to use, it is important to consider its potential drawbacks, such as sensitivity to noise and limited utility in sideways markets. As with any trading strategy, it is important to carefully test and assess its effectiveness before using it in live trading, and to use proper risk management techniques. You can always practice trading on a forex demo account to begin with so you can practice your strategies without taking any risks.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
