Adaptive RSI Indicator

The ARSI (Adaptive Relative Strength Index) is an interesting indicator. It reduces market noise and makes market trends more visible. The indicator achieves its goals by filtering out market noise by averaging the price values of the periods over which it is calculated. The values are calculated automatically in a unique way: the indicator adapts the smoothing constant to the current period’s RSI value while calculating each period’s value. As a result, the ARSI becomes extremely sensitive to price movements and appears to move through the middle of numerous sideways periods. This procedure is used to compute all of the price values of the indicator on the chart. The ARSI indicator is displayed as a line on the market price chart or in a separate space below it.

What is the Adaptive RSI Indicator?

The Adaptive RSI indicator is a simple indicator that works similarly to the classic RSI indicator. The Adaptive RSI plots a signal line that is similar to the RSI but with some differences. The indicator identifies overbought and oversold areas and provides buying and selling opportunities. Furthermore, it detects bullish and bearish divergences and detects trends better than the classic RSI indicator. The Adaptive RSI is made up of only one line, which is a signal line. When the indicator moves lower, it indicates that the downtrend is coming to an end and the uptrend is about to commence. When the indicator draws an upward line, it denotes the beginning of a downtrend. The indicator is applicable to any timeframe.

Setting up the Adaptive RSI Indicator
Setting up the Adaptive RSI Indicator

Adaptive RSI Strategy

The Adaptive RSI technique is simple to grasp and use. The ARSI indicator is a signal line that indicates the trend’s direction. To use the indicator, you ought to recall the RSI’s standard settings. When the RSI falls below 30, it indicates that the market is oversold and gives a favorable buying opportunity. When the RSI is above 70, it indicates that the market is overbought and represents a favorable selling opportunity. If the signal moves downward, it indicates that the RSI is below 30, and you could enter buy positions. If, on the other hand, the indicator moves upward, it is a sell signal, and the RSI is above 70. This indicator also indicates trend reversals. When the indicator moves upward, it indicates that the market is overbought, and the price may fall. When the indicator forms a downward line, it signals an oversold state, and the price may rise.

Buy Signal

This could be your checklist for a buy trade:

  • When the indicator curves upwards from the oversold region.

Once this event occurs:

  • You could open a buy position after the bullish curve happens and you confirm your entry with bullish candlestick patterns.
  • You could set your stop loss just below the nearest swing low.
  • You could set your take profit at the nearest resistance zone, or you could exit trade when the indicator enters the overbought region.
  • For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
Adaptive RSI Indicator Buy Setup
Adaptive RSI Indicator Buy Setup

Sell Signal

This could be your checklist for a sell trade:

  • When the indicator curves downwards from the overbought region.

Once this event occurs:

  • You could open a sell position after the bearish curve happens and you confirm your entry with bearish candlestick patterns.
  • You could set your stop loss just above the nearest swing high.
  • You could set your take profit at the nearest support zone, or you could exit trade when the indicator enters the oversold region.
  • For good risk management, I would only consider trades with a risk to reward ratio of at least 1:2.
Adaptive RSI Indicator Sell Setup
Adaptive RSI Indicator Sell Setup

Adaptive RSI Pros & Cons

Pros

  • The Adaptive RSI Indicator helps the trader predict possible oversold and overbought levels so that they could act accordingly.
  • While predicting possible trend direction, this indicator may be used with any forex trading system or strategy to confirm trading entries or exits.

Cons

  • In the aspect of divergence, using the indicator may require some level of experience.
  • The indicator may give lagging signals, hence negatively affecting the trader’s risk to reward ratio.

Conclusion

The Adaptive RSI Indicator functions similarly to the standard RSI with a signal line. It displays overbought and oversold zones to the trader, identifying BUY and SELL signals. The Adaptive RSI Indicator is a straightforward indicator that provides traders with signals that may be utilized to ride trends. Furthermore, the indicator identifies major reversals to provide overall market momentum; however, traders should keep their expectations in check because this indicator does not guarantee profit. You can always practice trading on a forex demo account to begin with to improve your trading skills and build up your confidence.