Ever heard of RSI Channels? Most traders would probably answer no. Drawing channel lines on the RSI part of a chart probably seems fruitless. After all, what would be the point? Walter Baeyen’s feels there is a reason and to a certain point he is right, although this is a concept that should not precede learning how to trade RSI, the Relative Strength Index, as a standalone trading system using divergences and reversals first.
Once the trader has begun to get a hold on the entries and exits based on the above it may suit them to learn to draw channels on RSI. One of the interesting concepts with drawing channels on RSI is that the channels move opposite to what most traders think would be logical. RSIs predominate movement is across the chart.
When prices on a trading chart are moving downward the RSI channels are ascending or moving up. RSI follows these channels until they reach a certain level on RSI and then they move down through the bottom of the lower channel to a lower RSI and form a new channel. These channel lines slope from left to right across the trading chart from the bottom of the chart. Each time a channel is penetrated, price continues to move down.
A similar thing happens on an uptrending price chart. Here channels on RSI are descending and as price moves up, RSI moves up and forms a new channel but on top of the old channel. As long as new channels are stacked on top of the old in this fashion, prices will move up. These channels slope right to left from the bottom of the chart.
The interesting thing about RSI channels is that divergence and reversal signals along the channels become points of entry or exit. For example, if a reversal signals and price moves down and creates a new channel then stalls, the trader may want to exit. However, as RSI rises temporarily it may bounce off the top of the RSI channel at a moment of market momentum making for an excellent location to re-enter the market.
Utilizing the tools of RSI, which are for the most part unknown to many traders, the Forex trader can make excellent trading decisions based on a variety of signals and tools. The RSI channels are just one of the tools.