Learn The NEW RSI For Forex Trading Success!

Large numbers of traders today use RSI, the relative strength index to trade currencies on the foreign exchange market. Many however, have not learned what is called the New RSI. Learn Forex RSI correctly and you will add a powerful arsenal to your trading method.

First, what is the Old RSI (Relative Strength Index) and as first devised by Welles Wilder when he created the relative strength index over 30 years ago? It was a momentum indicator. Why is momentum important? Imagine if when you entered a trade the momentum was immediately behind you leaving a trail of price bars in your direction like the trail of smoke behind a rocket that was launched.

Momentum is important because he reduces drawdown which can quickly destroy a traders account balance.

Wilders technique taught traders to trade short when the RSI level reached 70 RSI and to buy when the RSI level reached 30. After a number of years it was discovered by one of Wilder's students (Andrew Cardwell) that this was not a consistent way to decide when to trade as when RSI reached these levels, prices could continue higher even when RSI was at 70 and prices could go lower even when RSI was at 30. It doesn't take much to see this by doing a little experiment on your own. Pick a favorite currency pair that is trending and find how many false signals you will find. It makes one much less confident when they see this illustrated.

So why use RSI at all?

The New RSI was discovered when the same student discovered a signal on RSI that few people even today are aware of and know how to locate. These are called "RSI Reversal signals" and they can be found on any currency pair and any timeframe. They can be found on any standard RSI and plotted manually or they can be "painted" on the screen automatically.

Reversal signals are not divergences although they look similar. Divergences actually occur most when a trend is reversing, in fact, they can often be a signal that a Reversal is about to occur in the opposite direction. Reversals also have a pre-trade target projection method which allows one to plan for their Risk-Reward Ratio in advance of the trade.

Article Source: http://EzineArticles.com/?expert=Paul_W._Dean

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