Why you should NOT be using RSI in your Forex Trading…

Pour yourselves a tea or coffee, you’ll be needing it…

The famous RSI indicator, with over 8 million search results on google alone, is regarded as the holy grail of all indicators and the biggest money-maker for people trading the markets using this tool.

The RSI Indicator looked simple when you first saw it.

Whenever somebody else used it, it worked well?

So what happened when YOU went on to try it?  Did you get the same results? Has it made you rich yet?

I’m almost certain that things didn’t work out as expected right? There are many reasons for this.

How to use the RSI Indicator

RSI indicator example

For the majority of traders, it is pretty easy.  Set your parameters at 70 and 30 (this is often automatically done for you).

When the line enters overbought territory above 70, wait for it to cross back below 70, and go short.

When the line enters oversold territory below 30, wait for it to cross back above 30, and go long.

So what’s the problem?

Here’s the issue:  Overbought and Oversold isn’t even a real thing in Forex.  It is in stocks.  It is in gold.  Those things have intrinsic value.  Currency pairs do not.  They can go as high or as low as they want to go, until a governmental body steps in, but that could take thousands of pips before that ever happens. So by definition, the RSI is already flawed in what it is meant to do.

Still not convinced? This should sway you…

The RSI indicator was created in 1978! That is 18 years before spot Forex was even open to the retail public, so you have a defunct indicator that you’re not even using for the right market. Do those failures make more sense now?

The vast majority of people who trade Forex lose money or cannot get to a point where they can make a living from it and it’s because of terrible tools like this.

Isn’t it also curious that you rarely find any negative coverage over the RSI indicator? That alone should worry you. You’re stuck in a bubble with everyone supporting the same few tools that everyone seems to use and end up being stuck in a rut. There are thousands of other tools out there that aren’t old and outdated, many were made for Forex as well! It’s down to you to find ones that you like and test them out thoroughly (back-test and forward-test them).

You don’t even need to look for tools that will give you a 100% win rate (I’m not convinced that such a system exists), as long as you have a great trade and money- management system in place. I’ll expand on that topic in a future blog…

Anyway, it is a hard pill to swallow for people who have either been told one thing their entire trading career or religiously use this tool.  So let’s go over each argument…

1 – But I See This Indicator on Big Financial Sites!

Great! It does not mean much.

CNBC and Bloomberg will, when they even bother to show technical analysis, often show a chart with the RSI underneath it.

Mr ‘I use big confusing words so that people think I know what I’m talking about’

To you, this gives the RSI authority.  These people are finance “specialists”.  They wear flashy, expensive suits.  They speak intelligently.

But guess what?

They are not Forex traders

They don’t actually make their money trading.  They don’t have to.  They can show you whatever they want, and right or wrong it doesn’t matter.

If they were right, they can replay it and show you how right they were.

If they were wrong, they can just move on to something else.  And by the way, they are wrong a lot of the time.

But all of this is null anyway, because rarely will they ever make a prediction as to long or short based on a chart they show you.  It almost never happens.  This is all because…

They are not technical traders

These news networks spend almost none of their time on charts and chart-reading.  Things like this are of no real interest to viewers of financial networks.  It takes too long to teach.  It doesn’t take long to simply broadcast news stories.

Technical traders like us are actually a rarity.  As for people watching at home, if you ARE going to show them a chart, you need to dumb it down as much as possible to avoid confusing the viewer.

There’s nothing as dumb and simple as a trend line or an indicator like the RSI.

And this does NOT give it credibility and it does NOT mean you should be using it too.

This is a stupid excuse for using the RSI.

2 – “It’s not just on Financial channels, I see lots of people/ YouTuber’s/ people with loads of followers using it”

Does “almost everyone” win or lose at Forex trading?  That’s what I thought.

This is not stocks.  You do NOT want to do what is popular.

The popular group forever ends up in the 99% of traders that will never be able to trade at a professional level.

If you haven’t figured this out by now, you need to, at all costs, avoid the tools that put you on the popular side of the trade at the most popular areas of the chart.

It’s the only way to put the odds in your favour.  We don’t have the luxury of knowing which side the herd is actually on, but we sure can up our odds of avoiding them by not using the same tools that they use.

And if you want to go completely against what I just said, then by all means, please go and use the most popular indicator in Forex; I wish you the best of luck with it.

3 – “I’ve had success trading with the RSI before”

Define “success”.  You won a few trades?  Good, you’re supposed to.  If the RSI was never ever right, we would all be millionaires because all we would have to do is take the opposite side every time. Are you winning with it consistently?  Is it making your trading account, at the end of the year, a double-digit ROI? Didn’t think so.  And if for some miraculous reason it was, just know there are way better options for you to be using, and that number could be a lot higher than it is.

You’re using your heart instead of your head — and you’ll never make much money that way.

When you learned of Forex trading for the first time, it was a very exciting time. 

It certainly was for me and even I started trading using the RSI as my go-to tool. You learned how to read a chart, which before you found to be daunting and overwhelming, it was now incredibly exciting.

The most thrilling part about it was how you could use these really easy tools, and just by the easy act placing them on your chart, you can now determine which way price was going to go! Brilliant!

Problem was, we were mislead and this isn’t the truth of things at all. What almost every Social media Forex guru loves to do too is that they only showed you examples where the indicator/tool worked swimmingly.

I understand they’re supposed to get you hyped up about trading and I get that you only really want to show your best results, but it’s misleading. In the past, I have also done this when documenting my trades for people to see; it is difficult to resist the urge not to.

It’s a trick pyramid-scheme companies and signal scammers use to lure in unsuspecting people who are new to trading; or for those who just want to show off their best trades. Only show them who’s winning — even if it’s only a very small amount of people. It’s also a convincing trick to money-crazed, eager individuals who want a better life for themselves (believe me, I have also fallen victim to this when I first started)

There’s no reason for Forex educators to do this, because there’s nothing in it for them. Yet they do.  And the one of the indicators they get people excited about the most is the RSI. Why?  Because again, it’s super easy to read and use.

So you began using it, and you wanted to see if other traders out there were using it too.

And they were!  A lot of them were! You felt a sense of belonging. A reassurance that you weren’t alone in trading a certain way… If the tool was not working its magic, it wouldn’t just be you who is in a dilemma as you could get reassurance from other traders; it’s a pretty comforting feeling.

But continuing to use a washed-out tool just because you feel safe using it alongside other people is not the way to go.

If it works so well and is used by so many traders, why aren’t more people making a living from Forex trading? Do I even have to ask that question for you?

Lets not shy away from reality, this realisation will benefit you in the long-run!

Conclusion

Remove the RSI Indicator off of your chart forever.  Your trading will improve.

And seek out better alternatives.  They are out there, and they are a lot better!

And don’t let anyone tell you this horrible, outdated, faulty indicator is a viable way to trade.  Get out of that popular circle, and into something that will make your account turn a real profit year after year.

And could you please stop trading the exact same way as these people?  They’re hindering your trading in addition to your real potential, not helping despite this being hard to see at first.

Best of luck going forward! Happy trading and don’t forget…

…Stay wild.

—TheWildtrader

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