Trading the RSI Crossover is one of the simplest yet effective forex strategies that you will come across. This makes it a popular choice amongst new forex traders who are looking for a way to identify extreme market conditions for possible entry and exit points. I will explain how the RSI Crossover Strategy works and how you can implement it within your trading strategy.
What is the RSI indicator?
In order to understand the RSI crossover strategy, you need to know what the purpose of the RSI indicator is. The Relative Strength Index (RSI) is a momentum indicator that is used to measure the magnitude of price change. It is one measuring unit that helps traders understand when a currency pair might be overbought or oversold. The RSI calculates the strength of a currency trend and is primarily used to predict reversals.
What is the RSI crossover strategy?
The RSI cross strategy is a basic forex system where traders will look to enter a reversal trade by taking a position when the RSI crosses over an extreme level. You can take the entry as soon as the RSI value reaches the extreme or wait until it crosses back to the other side.
The RSI crossover is an overbought or oversold strategy which finds crossovers of the RSI with specified levels. The RSI above the 70 level is considered overbought whereas the RSI below the 30 level is considered oversold.
Some traders believe that waiting for the RSI to turn around after the crossover can help to filter out false signals. This is because you will often see the RSI continue to get more and more extreme if there is a strong trend. If you enter a reversal position immediately, you could get caught on the wrong side of the market.
I would personally not blindly take RSI extreme crossover trades without doing my own market analysis. I think it can give too many false signals when used alone. Therefore, I would like to combine it with other technical indicators and price action analysis such as support/resistance and candlestick patterns. I find this helps to filter out trades where there is a strong trend and the market is not yet ready to reverse. You can time your entry/exit better this way.
Buy signal
- RSI value is below 30
- RSI value turns back above 30 (optional)
- Enter a buy trade
Sell signal
- RSI value is above 70
- RSI value turns back below 70 (optional)
- Enter a sell trade
What are the best RSI settings for divergence trading?
I like to use the default RSI settings simply because they are used by more traders. When more traders are following the same indicators with the same settings, I think there is a better chance that the indicator signals will be more reliable. The default RSI period is 14 whilst the extreme levels are 30 and 70 respectively.
The default RSI period is set to 14. Here’s what this conveys: On a 5-minute chart, RSI 14 signals are based on the last 70 minutes. On a 15-minute chart, RSI 14 signals are based on the last 210 minutes (3.5 hours), and so on.
You are free to adjust the RSI periods and levels if you wish. The lower the RSI period, the more extreme buy and sell signals you will get. However, this will increase the possibility of false signals. If you increase the RSI periods and levels, then you will get less signals but it may help to prevent entering too early.
Which timeframe is best for RSI divergence trading?
From my experience, the RSI crossover strategy is more accurate on the higher chart timeframes such as the 4-hour and daily charts. Yes, you can use it on the 1-hour charts and below, but you may find that there are many false signals.
This is because there is a lot of market noise on the lower chart timeframes which I find makes it hard to determine established trends and reversals. If trading with the RSI on a lower chart timeframe, you might want to increase the RSI periods to try and reduce false signals.
That being said, you can use the RSI crossover strategy for scalping a few pips. If you do decide to go this route, then you would certainly want to add some additional chart analysis for confirmation of extreme crossover signals. If you are swing trading on the higher timeframes, then you can save yourself some time and hassle from trying to pick tops and bottoms on volatile charts.
RSI crossover Pros & Cons
Pros
- Identify overbought/sold markets
- Enter new trends early
- Can complement other indicators
- Very easy to spot extreme RSI levels
Cons
- Does not work well on its own
- Requires further confirmation
- False entries during a strong trend
Conclusion: does the RSI crossover strategy work?
Yes, trading RSI extremes can be part of a successful strategy but I would not use them on their own. I think that the RSI crossover should be combined with other forms of technical analysis in order to filter out many false signals.
For example, you could wait for price to move above or below a moving average crossover to confirm the start of a new trend before taking a buy or sell trade at an RSI extreme level.
A forex demo account can be a great way to practice trading with the RSI crossover strategy without taking any risk. This way you can familiarise yourself with how it works and practice your trading strategies until you build enough confidence to open a live account. You can get a free demo account from most forex brokers including IC Markets.
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.
