The RSI Bands indicator applies bands on the chart to identify the trend’s direction. This guide will talk about how the indicator works and how you can apply it as a strategy.
What is the RSI Bands Indicator?
The traditional RSI is one of the most popular indicators in the forex market. The RSI Bands is a modified version of standard RSI. It applies upper and lower bands and looks similar to Bollinger Bands.
Like the traditional RSI, the RSI Bands tell about the overbought and oversold levels. Level 70 is the default overbought level, while 30 signifies the oversold level.
RSI Bands Indicator Strategy
To trade with the RSI Bands indicator, you must look at the upper and lower bands, which mention the overbought and oversold levels. The lower band is considered an oversold level, while the upper band is considered the overbought level.
Whenever the price breaks the bands, you can enter the trade. If the price breaks above the upper band, we have reached an overbought level, and the price may reverse downwards.
Conversely, if the price breaks below the lower band, it illustrates an oversold level, and we can expect a bullish reversal soon.
Although the indicator works fine, you can add the traditional RSI and RSI Bands. As you must have seen on the chart above, there is no RSI in the window below the chart. The indicator uses the RSI in its calculation but doesn’t show the RSI on the chart.
So, you can add the RSI separately to get further confirmation of where the trend is heading.
The good thing is you can use the RSI bands at any timeframe. If you are applying the indicator or short-term strategies, it’s best to look for the overall trend on a longer timeframe and then take positions on a lower timeframe.
- The price must dip below the lower band.
- Wait for the price to continue upwards and then enter the trade.
- You could place a stop-loss at the recent low.
- You could set take-profit at the previous high or exit the trade when the price exceeds the upper band.
- The price must go above the upper band.
- Wait for the price to continue downwards and then enter the trade.
- You could place a stop-loss at the recent high.
- You could set take-profit at the previous low or exit the trade when the price goes below the lower band.
RSI Bands Indicator Pros & Cons
The RSI Bands are good for many trading opportunities, but on others, they aren’t. Let’s see its pros and cons.
- The RSI Bands are simple to identify and trade.
- It presents clear entry and exit points.
- Sometimes the price may not reverse, even after it goes above the upper band and below the lower band.
- The indicator may not work properly on shorter timeframes.
The RSI Bands tell about the overbought and oversold levels by plotting upper and lower bands. The indicator is easy to use and can be combined with multiple strategies. However, you may want to confirm all signals with additional market analysis. I would be looking at price action including support and resistance levels along with any bullish or bearish candlestick patterns. As with any forex strategy, you should have excellent money management so that one bad trade does not cancel out a consecutive run of winners. You can always practice trading on a forex demo account to begin with to improve your trading skills and build up your confidence. Most forex brokers provide a free demo account, including IC Markets. They are my top choice for both manual and automated forex trading systems. This is because they have tight spreads, quick execution speeds, low commission fees and excellent 24/7 support.
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