If trading with one indicator is useful, what if you could confirm each signal with the same indicator but using different settings? This may sound obvious, but it is something that is often overlooked by beginners. For example, you could use the double RSI strategy to double confirm each buy and sell signal whether that is on the same timeframe with different settings, or on different timeframes with the same settings. I think this is one of the easiest ways to enhance what may otherwise be a very basic forex strategy.
What it the RSI?
In order to understand how the double RSI strategy works, you first need to know what the RSI indicator is. The relative strength index (RSI) is one of the most popular forex indicators that comes as standard with the majority of forex trading platforms, including MetaTrader 4 (MT4).
The RSI crossover strategy and RSI divergence are 2 of the most well-known ways to interpret this indicator signals. It can be used to find tops and bottoms in the market so you can look to get into new trends on reversals. In this double RSI strategy, I will be including both of these signals on each RSI top make sure we get the strongest possible trading signal from the indicator.
How to use the RSI?
The RSI measures the ratio of up-moves to down-moves, and normalises the calculation so that the index is expressed in a range of 0-100. It was originally developed by J.Welles Wilder. If the RSI reading is 70 or greater, the instrument is considered to be overbought. On the other hand, an RSI reading of 30 or less is used as a signal that the instrument may be oversold.
If a chart is showing RSI divergence then the RSI has lower highs when price is at a higher high or the RSI makes higher lows when price makes new lower lows. When RSI stops breaking out to higher highs during an uptrend in price or breaking down to lower lows when price is in a down trend then it is said to be an RSI divergence. A divergence is a signal that the current trend in the time frame on the chart has lost momentum.
When you combine the RSI divergence and RSI crossover strategies, you have an easy to understand yet good base for a trading strategy. If you do that twice with a double RSI indicator, you can increase your edge even further.
How to trade the double RSI strategy
The double RSI strategy can be traded by itself or you can confirm each buy and sell signal with other technical indicators and price action analysis. I like to add a few more indicators just to help filter out some of the bad trades and so that I don’t get into a trade too early. This means I can usually use a tighter stop loss as well. If a trade does not feel right, I would just skip it and wait for the next opportunity to come alone.
Buy signal
- Load two separate RSI indicators on your chart
- Leave one RSI on the default setting and set the other to a longer period
- Wait for both RSI signals to go below 30 (oversold)
- Confirm with additional indicators and price action analysis
- Place stop loss just below recent support
In the EUR/USD 1-hour chart below, you can see that the double RSI indicators (14/21) were showing the market looked oversold as both are below 30. There is RSI divergence showing the indicators both heading upwards. This bullish momentum is confirmed by strong support and price action crossing above the moving average. All of this indicated a buy opportunity with a relatively tight stop loss just below the recent support level. This stop loss would have been around 20 pips which gives us a very favourable risk to reward ratio when you consider price shot up over 200 pips.
Sell signal
- Load two separate RSI indicators on your chart
- Leave one RSI on the default setting and set the other to a longer period
- Wait for both RSI signals to go above 70 (overbought)
- Confirm with additional indicators and price action analysis
- Place stop loss just above recent resistance
In the EUR/USD 1-hour chart below you can see that the double RSI indicators (14/21) were both above the 70 level, suggesting that the currency pair was overbought. There is also strong divergence on both showing downward momentum. We then saw price fall below the moving average and an engulfing bar candlestick pattern to confirm the sell trade. The recent resistance is around 20 pips away which could have been a good place to put the stop loss. The trade went on to make over 200 pips which is again a very solid risk to reward ratio.
Double RSI strategy Pros & Cons
Pros
- Extra confirmation on trades
- Easy to understand
- Can spot new trends and reversal points
- Can work on any currency pair and timeframe
- RSI indicator is free to use
- Settings can be adjusted accordingly
Cons
- Requires confirmation from other indicators / analysis
- There will be false signals as with all forex strategies
- Needs sensible money management
What are the best settings for the double RSI strategy?
I personally like to use the default RSI settings and levels on one of the indicators. For the other RSI, you might want to consider a shorter period if you are an aggressive trader, or a longer period if you are more of a conservative trader. In general, the shorter the periods you use, the more signals you will get. However, this may be at the cost of quality due to less price data being used.
What is the best timeframe for the double RSI strategy?
You also can trade the two RSI strategy on any chart timeframe. Anything below the 1-hour chart may give you more buy and sell signals, but they might not be as reliable. I find the lower chart timeframes can be too noisy at the best of times. Trading higher chart timeframes also means less time chart watching and waiting for signals which is another bonus from my perspective.
Conclusion: is the double RSI strategy any good?
Yes, I think that combining two RSI indicators is certainly better than using one. However, it is only going to be as consistent as the trader using it. I have seen the exact same forex strategy give a completely different set of results simply because each trader was using different money management.
I would only be looking to take trades that give a favourable risk to reward ratio. Nothing can be more frustrating seeing one bad trade take out a run of winners. You will also need to have your trading discipline and emotions in check as these can also have a big impact on performance.
A forex demo account can be a great way to practice trading the double RSI strategy and build your confidence without needing to take any unnecessary risk. You can get a free demo account from most forex brokers, including IC Markets. They have excellent conditions for trading forex including tight spreads and quick execution speeds.
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.
