Advantages of Using RSI in Forex
The popularity of RSI as a forex indicator is a product of its distinct advantages as a research and evaluation tool. Top benefits of using RSI include:
- It utilizes a simple mathematical formula. Unlike other technical indicators, the math behind RSI is simple enough that traders could do it by hand, if necessary. While it’s always better to use a live chart that tracks RSI in a visual format, traders may find comfort in knowing exactly what these insights are based on.
- It offers easy chart analysis. Because the overbought and oversold levels of RSI are clearly delineated, the indicator is very easy for even beginner traders to use—but still accurate and insightful enough that veteran traders will continue to rely on it.
- It provides simple notifications for identifying trade opportunities. Most traders use RSI to signal potential trade opportunities rather than relying on them as a sole indicator to initiative trades. As a result, many traders will set notifications for currency pairs that are activated once overbought or oversold conditions develop. This helps traders stay on top of evolving forex trends without missing out on new potential trades.
Disadvantages of Using RSI in Forex
For all of the value RSI offers to forex traders, it isn’t foolproof. While many disadvantages of RSI are exacerbated by misuse of this indicator in your trading strategy, there are certain limitations to keep in mind, including:
- RSI isn’t a great tool for confirming or executing trades. Most forex traders find RSI most valuable as a preliminary indicator that identifies trade opportunities and prompts further research and evaluation. This is because RSI does a great job of identifying overbought or oversold conditions, but it doesn’t offer the context needed to determine why or whether these conditions reflect a good trading opportunity.
- The time line for price reversals can be unpredictable. Even when RSI correctly predicts price reversals, conditions can remain overbought or oversold for days—far beyond what some traders are looking for.
- RSI can become less accurate when forex trends are strong. While RSI may still offer some value in strong trends, it should be used with extra caution.
If you don’t like the standard RSI, you can try the Currency RSI Scalper