In the first instalment of this post, you learned about what Forex trading strategies are, why you need one, and how you can get to easily build it by using one of those readily-available and most-used technical indicators. Hence, by now, you have known how to use the Bollinger Bands to develop a Forex trading strategy.

Our discussion of technical analysis based Forex trading strategies continues. Here, you will learn how to use two other strategies which are woven around two of the most important technical indicators, the Relative Strength Index (RSI) and the Average Directional Index (ADX). So, read on.

The Relative Strength Index (RSI) Forex Trading Strategy

The Relative Strength Index (RSI) technical indicator has become so popular with so many Forex traders for good reasons. Importantly, the popularity can be attributed to its effectiveness for the determination of overbought and oversold market regions. However, if you really want to appreciate the indicator, you should first strive to know how it works.

First, you should know that RSI is a momentum technical indicator. That is, it measures how strongly the market price is advancing in a particular direction. This it does by analysing an array of recent closing prices. So, by comparing higher closing prices to lower ones, the indicator is able to discover when a pair has had strong positive and negative changes.

The RSI works on a scale of 0-100. The high and low levels of the scale are set at 70 and 30 respectively. Although this is the convention, more extremes, such as ranges of  80 to 20 and 90 to 10 are also made use of. The advantage of this is to indicate stronger momentum. 

Similarly, also, the RSI’s timeframe can be adjusted based on the type of market outlook, whether long or short term, that you want to assume. Indeed, it is mainly because of its flexibility that it has become one of the most popularly-used technical indicators around.

Using the Relative Strength Index (RSI) Forex Trading Strategy

To use the Relative Strength Index (RSI) Forex Trading Strategy, you have to first attach the RSI indicator from your trading platform. Then, you will drag and drop it on the chart window. Having done this, by using the simple technicalities of the index, you can recognise critical market levels and take important decisions in your trading.

The RSI Forex Trading Strategy. ©Eurusd.com.

For example, one way by which you can apply the RSI is to use it to check for when the market is already either overbought or oversold. For example, when the scale reads below 30, it means that the market might be oversold. So, the price can rise any time soon, and a buy trade can be placed.

On the other hand, when the indicator reads above 70, an overbought market is suggested, meaning that a decline is in sight. This chart reflection signifies that a sell trade can be entered. It might also interest you to know that the RSI reads above 50 during an uptrend and less than 50 during a downtrend.

However, notwithstanding the reading of the scale, whether above 70 or below 30, you should always first confirm the reversal in the price move before you ever place a trade. 

The Average Directional Index (ADX) Forex Trading Strategy

Many technical indicators can tell you the direction of the market. However, only a few can also tell you it’s strength in that particular direction. The Average Directional Index (ADX) is one of those few. It helps to determine the nature of the trend, whether it is bullish or bearish, while also giving indications about its strength. 

Whether used alone or in combination with other strategies, the ADX will ensure that you ascertain the strength of trends so that you can take only high-probability trades that will yield high results. However, it must be stated that the ADX Forex Trading Strategy is most effective when used together with other similar strategies, though.

For example, you might have a tough time determining the direction of a trend with this indicator. But once you combine it with the RSI and Bollinger Bands, it becomes more effective. While the ADX will tell you if there is a trend and the RSI will inform you about the exact momentum plays, the Bollinger Bands can serve as a gauge of the volatility in the market. 

Using The Average Directional Index (ADX) Forex Trading Strategy

The Average Directional Index (ADX) Forex Trading Strategy is easy to use. The indicator basis of the strategy has a reading scale of 0-100. A reading of 100 indicates a very strong trend move while a reading of 0 means a non-existent trend. As a result, whenever you get a reading close to 100 on its scale, the indicator is telling you that the trend is really fast-moving and you might consider placing a trade.

The ADX Indicator. ©The Option Guide.

On the other hand, a very low ADX reading means that the market does not have a definite trend. That is, the market is consolidating or moving sideways. Of course, a consolidating market is a hard market to make money in. Hence, it is advisable that you do not trade during such a market condition. 

ADX values are considered high when they are above 50. When they are below 20, they are regarded as low. Finally, importantly, when trading with this strategy, you should know that the indicator only tells the direction of trends, and not whether the market price will go up or down.

Conclusion

Here, you have learnt how to use the Relative Strength Index (RSI) and the Average Directional Index (ADX) Forex Trading Strategies. Based on your understanding, you should want to pick one that will be most suitable for your needs and will help you achieve your trading objectives. 

However, if you do not have to worry about directly using any strategy to trade and having to do all analyses yourself, you should seriously consider using best forex signals. For this purpose, 1000pipBuilder is always willing to help. So, you should consider subscribing to their service.