Tutorial on Optimizing RSI Indicators for the Best Trading Results
The Relative Strength Index (RSI) is one of the most popular technical indicators among forex traders. However, RSI indicators are also often accused of being easily missed or inaccurate. In fact, there are several simple ways to optimize the RSI indicator in order to obtain maximum trading results.
Inaccurate RSI Indicator?
Theoretically, the RSI indicator always fluctuates between levels 0 and 100 along with changes in the price of the currency pair. Therefore, traders generally set thresholds at levels 30 and 70 as a barrier between oversold and overbought conditions.
If the indicator falls below 30, it means oversold, and the price will reverse. If the indicator breaks the 70 level, it means overbought, and the price will reverse.
However, in practice, traders will often find that:
1. The indicator does not come out from below level 30 or vice versa, it doesn't drop from level 70, even though it's been days. This is a "trending" market situation. If you are not ready to deal with it, then you can get stuck floating negative for a long time and end up being hit by a Margin Call.
2. The indicator does not go above level 70 nor fall below level 30, even though it has been for days too. This is usually associated with a "sideways" market situation and low volatility. If you are not ready to face it, then you will not be able to open trading positions because there is no signal.
Steps for Optimizing the RSI Indicator
To avoid being trapped by the myth of the inaccuracy of the RSI indicator due to the two cases above, you can try applying the following steps:
1. Slide the RSI oversold and overbought thresholds to levels 20 and 80. On the Metatrader platform, options like this will appear to customize the RSI indicator. Choose 20 and 80 so that the level is marked automatically by the platform.
This step allows traders to sort oversold and overbought signals more accurately, rather than staying at 30-70 levels.
Trading signals buy or sell
2. For buy or sell trading signals, pay attention to the 50 level midline. If the RSI indicator rises above 50, it means it's time to look for moments to buy. Meanwhile, if the RSI is below level 50, it means it's time to sell. It's best not to use oversold and overbought levels as a marker to buy or sell; but rather as a time marker to close trading positions.
3. Change the period parameters on the RSI indicator according to your trading period. By default, the RSI indicator has a 14 period setting. However, traders using short-term timeframes (H4 or lower) should use a smaller period, for example 9. While long-term traders should use a higher period, for example 25. This parameter can also be modified easily on the Metatrader platform. Try setting the RSI indicator in this way, then practice it.
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