Which Indicator Works Best With RSI?

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Best indicators to pair with RSI:

Moving Average. Smooths price data to identify trends and confirm RSI signals.
Bollinger Bands. Highlights volatility and potential reversal zones alongside RSI overbought/oversold levels.
MACD. (Moving Average Convergence Divergence) Confirms momentum and trend direction when combined with RSI.
Stochastic Oscillator. Enhances overbought/oversold analysis for more precise entry points.
ADX (Average Directional Movement Index). Gauges trend strength to filter RSI signals in trending markets.
ATR (Average True Range). Measures volatility to assess risk and refine RSI-based strategies.

In this article, we will discuss using the Relative Strength Index (RSI) in technical analysis and the best indicators to use in conjunction with it. First, we will look at some of the best indicators to use with RSI, including how they can be used together to improve the accuracy of technical analysis. Next, we will explore how RSI works and why it is a popular indicator among traders. Finally, we will examine whether it is beneficial to use RSI with other indicators and its potential advantages.

Best indicators to use with RSI

There are several indicators that can be used in conjunction with the Relative Strength Index (RSI) to improve the accuracy of technical analysis. Some commonly used indicators that work well with RSI include:

Moving average

One of the most commonly used indicators in technical analysis, moving averages can be used to identify trends and help confirm RSI signals. Moving averages can be used in conjunction with RSI to confirm a trend's direction and identify potential support and resistance levels.

Bollinger bands

Bollinger Bands are a volatility indicator consisting of a moving average and two standard deviation lines plotted two standard deviations away from the moving average. When RSI is combined with Bollinger Bands, traders can get a sense of whether an asset is overbought or oversold relative to its recent price history, which can help identify potential trend reversals.

Moving average convergence divergence (MACD)

The MACD is a momentum indicator that can help confirm the direction and strength of a trend. When combined with RSI, the MACD can help traders identify overbought and oversold conditions and potential trend reversals.

Stochastic oscillator

The Stochastic Oscillator measures the position of the current price relative to the price range over a specified period, helping to identify overbought or oversold conditions in an asset. When combined with the RSI, the Stochastic can provide more accurate signals for short-term trades, especially in volatile markets. For example, when both indicators show overbought conditions, this can strengthen the sell signal.

Average directional movement index (ADX)

The ADX measures the strength of the current trend without specifying its direction. ADX values above 25 usually indicate a strong trend, while values below 20 indicate a weak or no trend. By combining ADX with the RSI, traders can filter the RSI signals, taking into account only those that are consistent with a strong trend, which improves the accuracy of trading decisions.

Average true range (ATR)

The ATR measures market volatility by showing the average price range over a specified period. High ATR values indicate increased volatility, while low values indicate a calm market. Using ATR with RSI allows traders to take volatility into account when evaluating RSI signals, which helps avoid false entries during periods of high uncertainty.

How does RSI work?

The Relative Strength Index is designed to measure the velocity and magnitude of directional price movements.

Fundamental mechanics

At its core, the RSI is a momentum oscillator, ranging between 0 and 100. It quantifies the speed and change of price movements, offering a graphical representation of market momentum.

The formula compares the average price increases over X periods to the average declines over X periods, thereby calculating the relative strength or weakness of the stock or asset in question.

Interpretation

Typically, an RSI value above 70 indicates that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective price pullback.

Conversely, an RSI value below 30 suggests an oversold or undervalued condition, signaling a potential upward turn in the price.

One critical aspect of RSI analysis is identifying divergences. When the RSI diverges from the actual market price, it can be an early indicator of a potential trend reversal. For example, if a security’s price hits a new high but the RSI does not, it may indicate weakening momentum and a possible sell-off.

Traders utilize RSI not only to assess overbought and oversold conditions but also to confirm trend formations or to spot potential entry and exit points based on RSI readings.

It is important to note that while RSI is a powerful tool, it is most effective when used in conjunction with other technical analysis tools and methods.

Should I use RSI with other indicators?

According to experts, using RSI in conjunction with other indicators can be beneficial for several reasons.

Pair RSI with trend-following indicators.RSI is great for spotting overbought or oversold conditions, but it works even better with trend-following indicators like moving averages. Together, they help confirm whether the trend is still strong or if a reversal is coming.
Combine RSI with volume to double-check signals. Volume can make your RSI signals more reliable. If RSI shows the market is overbought but volume is low, the signal might not be as strong. Pairing RSI with volume gives you extra confidence before taking a position.
Add MACD to verify RSI momentum. RSI tells you when momentum is shifting, but MACD confirms trend changes. When both indicators line up, it’s a stronger signal to act on, whether you're entering or exiting a trade.
Don’t use too many of the same kind. It’s tempting to add more oscillators like Stochastic or CCI, but using too many of them can confuse you. Stick to one or two, and focus on the clarity they provide.
Adjust RSI to fit different market times. The standard 14-period RSI works well, but adjusting it to shorter or longer timeframes can give you a more accurate view for your strategy. Shorter timeframes give quicker signals, while longer ones smooth out market noise.

Common mistakes to avoid

When using the Relative Strength Indicator (RSI), traders may encounter a number of common mistakes that reduce the effectiveness of the analysis and lead to incorrect trading decisions. Let's look at the main ones:

Relying only on RSI signals

Using RSI as a sole analysis tool can lead to false conclusions. RSI, like any indicator, has limitations and can give incorrect signals, especially in strong trends or high volatility. To improve accuracy, it is recommended to combine RSI with other technical indicators, such as moving averages or MACD, and take into account the overall market context.

Using an excessively short RSI period

Setting the RSI period too short (for example, less than 7) can lead to frequent and unreliable signals, making it difficult to make informed trading decisions. Short periods make the indicator more sensitive to minor price fluctuations, increasing the number of false positives. It is recommended to test different RSI settings on historical data to determine the optimal period for a particular asset and trading style.

Lack of confirmation of RSI signals by other instruments

Ignoring additional confirmations can lead to premature entry or exit from a position. To increase the reliability of RSI signals, it should be used in combination with other indicators, such as trading volume, moving averages or Bollinger Bands. For example, the coincidence of RSI signals with a breakout of a support or resistance level can increase confidence in the decision made.

Tips for using RSI effectively

The RSI indicator allows traders to analyze market movements and find potential entry and exit points. Its effectiveness depends on the right settings, combination with other tools and testing on historical data. We have prepared a number of recommendations that will help adapt the RSI to different market conditions and improve the accuracy of signals.

Using shorter RSI periods for dynamic markets such as Forex

For fast-reacting markets such as Forex, it is recommended to use shorter RSI periods, such as 5-7. This allows the indicator to react faster to price fluctuations, providing timely signals for short-term trades. According to Traders Union, RSI periods in the range of 5-7 are optimal for scalping on 1-minute or 5-minute charts.

Combining RSI with Bollinger Bands to confirm extreme price levels

Combining RSI with Bollinger Bands can help identify potential price reversal points. When the RSI reaches overbought or oversold levels at the same time as the price touches or breaks the upper or lower Bollinger band, it may indicate a possible trend reversal. This combination combines volatility and momentum assessment, increasing the accuracy of signals.

Backtesting RSI settings to adapt to the behavior of a specific asset

Before using RSI in real trading, it is recommended to test various indicator settings on the historical data of the selected asset. This allows you to determine the optimal parameters that correspond to the specifics of the price movement of a given instrument and increase the reliability of signals in the future. Backtesting helps to adapt the indicator to the unique characteristics of each asset.

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Fibonacci retracements and OBV improve RSI accuracy

Pairing RSI with complementary indicators can improve your trading results if you use the right combinations. A smart way to combine RSI is with Fibonacci retracement levels to spot potential reversal zones. While RSI highlights overbought or oversold conditions, Fibonacci retracements point out key support or resistance areas. This combination is especially good for spotting when a pullback might end, helping you place better-timed trades during market trends when prices hit retracement levels like 38.2% or 61.8%.

Another rarely used yet effective combination is RSI with On-Balance Volume (OBV). RSI shows momentum changes, but OBV reveals if the volume supports the price move. For example, if RSI suggests a reversal but OBV shows no change in volume, the signal may be weak. However, if OBV shows heavy buying or selling, it strengthens RSI’s signal, offering stronger validation for smarter trades.

Conclusion

RSI remains one of the most popular technical analysis tools due to its simplicity and effectiveness. However, its use becomes much more accurate if combined with other indicators, such as moving averages, Bollinger Bands or ADX. Such combinations help filter out false signals, better understand market conditions and make more informed trading decisions. Before applying any strategy, it is important to test it on historical data to adapt the indicator settings to a specific asset. Using RSI in combination with other tools allows you to increase the reliability of the analysis and optimize trading results. The trader only needs to choose the right combination that suits his style and goals.

FAQs

What is the best RSI trading strategy?

The best RSI trading strategy will depend on market conditions, personal preference, and the risk tolerance of the trader. Some popular strategies include using RSI to identify overbought and oversold conditions, using RSI to confirm trends, or using RSI to identify divergences.

What is the best time frame for RSI?

The best time frame to use RSI can vary depending on the trader’s goals. Short-term traders may find that using RSI on a lower time frame, such as a 5-minute chart, is most effective. On the other hand, long-term traders may prefer to use RSI on a higher time frame, such as a daily chart.

Is RSI the most reliable indicator?

The RSI is a widely used and popular indicator, but no indicator is 100% reliable. RSI is considered a momentum oscillator that can provide overbought and oversold conditions, but it should be combined with other indicators and analysis methods to create a complete trading strategy.

Are MACD and RSI a good combination?

The RSI and MACD are momentum indicators and can be used together to identify overbought and oversold conditions and potential trend reversals. Both indicators are widely used in technical analysis, and when used together, they can provide a complete picture of the state of the market. However, understand the characteristics of these indicators to combine them well with other indicators and analysis methods.

Team that worked on the article

Maxim Nechiporenko has been a contributor to Traders Union since 2023. He started his professional career in the media in 2006. He has expertise in finance and investment, and his field of interest covers all aspects of geoeconomics. Maxim provides up-to-date information on trading, cryptocurrencies and other financial instruments. He regularly updates his knowledge to keep abreast of the latest innovations and trends in the market.

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Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.

As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).

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