Anyone with a computer and a connection can start trading right this moment. While global access can be a positive – you can make a great living off trading – it has its downsides.
One of the best examples of the dual nature of Forex technology comes with increasing access to various indicators. The Relative Strength Index (RSI) is an excellent case-study of a misused Forex tool. While the best RSI indicators can help a smart trader, the average trader might well jump in without much thought.
Let’s take a look at what the RSI indicator in fact is, and why it is so misunderstood.
What is the RSI?
The Relative strength Index is a measurement of the ration of up-moves to down-moves of a trade. It calculates a number between 0 and 100. If you interpret it accurately, it gives you an indication of whether the market is overbought or oversold.
Interpreting it can seem rather simple.
If the RSI is less than 30, the market is oversold and the price is due an increase. Once you see the reversal begin, you can place a buy trade.
If, however, the RSI is more than 70, it means the market is overbought and is due a decrease. At this point, it can be a good idea to sell.
Unfortunately, the RSI is deceptively simple. In many ways, there are few indicators that can be used more easily. However, there are multiple parameters that need to be tested before you get a good grasp of how to use the indicator.
Many novices use the RSI simply by assuming they can sell in an overbought market and vice versa. They fail to understand that those are not the only requisite factors for a good trade. The RSI can actually indicate the best price to enter or exit that trade, as well as the most active trading timeframe.
Should I use it?
When it comes down to the basic question – whether to use the RSI indicator to trade Forex and CFDs – the answer is therefore: maybe. It can be a very useful tool. However, if used incorrectly, you can lose a lot of money.
Which makes it an excellent representation of the Forex market itself.
Forex trading: access does not imply success
Forex and CFD trading is becoming increasingly popular, for one simple reason. Anyone can do it at any time. There’s the thrill of making trades without the boredom of work.
And that’s where the danger lies. It can become more like gambling than a legitimate investment.
Success in Forex trading requires a fair amount of work. It’s not a get-rich-quick scheme. And there are no magical tools or indicators that will work for everyone.
Forex trading is an accessible and enjoyable way of making money. While it’s tempting to try to “play” the markets, like a game, every responsible trader has to work at it.