There are 4 trading signals associated with RSI; positive and negative divergence and positive and negative reversals. In a 9 ½ year study beginning in 2000 there were 6702 reversal signals on the EURUSD hourly charts averaging over 70 pips per trade. This is significant information because it shows that the RSI indicator (Relative Strength Index) is a viable Forex standalone trading system.
The reason RSI works as a standalone system is that RSI measures 2 kinds of momentum and uses a 3rd kind of momentum to enter the market.
Momentum type number one
The first type of momentum is measured in RSI when price is being slowed down in a trending situation. For example if prices are moving downward there would are two kinds of signals that would predominate on RSI charts; positive divergence and negative reversals. For traders who have traded divergences before on RSI or other momentum indicators this is probably the opposite of what they were doing as a positive divergence would indicate that prices were reversing to the upside. This however is exactly opposite. Positive divergences in downtrends lead to reversal signals that move the market downward. This is momentum then that is slowing the market from moving down too fast or in an uptrend it is the momentum that is slowing price from moving upward too fast.
Momentum type number two
After momentum type number one is completed momentum type number two take over. It is the force that typically alerts traders to the fact that the…