Introduction to the Extreme RSI Indicator
The Relative Strength Index (RSI) is one of the most popular oscillator types of indicator used to identify overbought and oversold price levels. Traders typically identify such conditions based on the RSI line breaching above 70 or dropping below 30. The Extreme RSI Indicator is a tool which can help traders identify mean reversals based on this concept.
What is the Extreme RSI Indicator?
The Extreme RSI Indicator is a mean reversal signal indicator which identifies potential mean reversal signals coming from an overbought or oversold price level based on an underlying RSI Indicator.
This indicator plots an arrow point up to indicate a bullish mean reversal coming from an oversold price level and an arrow pointing down to indicate a bearish mean reversal coming from an overbought price level.
How the Extreme RSI Indicator Works?
This indicator identifies overbought and oversold price levels using an underlying RSI Indicator.
It identifies an oversold market whenever the underlying RSI is below 30. It then indicates a bullish mean reversal whenever the underlying RSI crosses back above 30.
Inversely, this indicator identifies an overbought market whenever the underlying RSI is above 70 and indicates a bearish mean reversal whenever the underlying RSI crosses below 70.
How to use the Extreme RSI Indicator for MT4
This indicator allows users to modify the sensitivity of this indicator as well as the frequency of the signals it produces within its indicator settings.
The “rsiperiod” modifies the number of periods used to compute for its underlying RSI. The higher the number, the less sensitive the indicator is and the less frequent the signals become.
This indicator can be used as a mean reversal entry signal indicator. Traders can trade in the direction pointed by the arrow as soon as the arrow forms. However, these signals should be traded in confluence with other technical analysis indications such as reversals from a support or resistance line or supply and demand zones.
Buy Trade Setup
When to Enter?
Identify a support area. Open a buy order as soon as the Extreme RSI Indicator plots an arrow pointing up coming from a reversal on the support area. Set the stop loss below the support area.
When to Exit?
Set the take profit target on the opposite resistance area.
Sell Trade Setup
When to Enter?
Identify a resistance area. Open a sell order as soon as the Extreme RSI Indicator plots an arrow pointing down coming from a reversal on the resistance area. Set the stop loss above the resistance area.
When to Exit?
Set the take profit target on the opposite support area.
Conclusion
This indicator works well when used in a ranging market environment with wide swings. This is because the support and resistance areas of the range also tend to be the area where the RSI would start to become overbought or oversold. However, this indicator should not be used in trending market conditions because the signals produced are typically countertrend signals. These signals are usually low probability signals which can often result in a loss.
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