The Relative Strength Index (RSI) is one of the most widely used momentum indicators in the foreign exchange markets. Instead of price as its input, the Schaff TCD RSI (STCDR) uses the Schaff Trend CD (See Schaff Trend CD). The resulting indicator has the benefit of putting the Schaff Trend CD on a scale of zero to 100, making it easier to identify potential overbought and oversold levels in a currency trend.

The 15-minute USDCHF chart shows a purple Schaff TCD RSI in the middle chart panel compared to a yellow standard RSI in the lower chart panel. The STCDR is considerably smoother compared to the choppy path of the standard RSI. In addition the STCDR moves significantly above 80 and below 20, creating clearer turning points, whereas the standard RSI reaches 80 only once and never falls below 35.

The Schaff TCD RSI is generally used in combination with other indicators, such as the Schaff TC1 that uses the same input. When the STCDR is below the 20-line, traders can wait for it to rise above 20 to confirm a Trend Cycle low. Similarly if the STCDR is above the 80-line, traders can wait for it to fall below 80 to validate turns in the TC1 Indicator.

In the chart above, the TC1 Indicator turned up twice from below the 20-line without the STCDR following. Non-confirmation by the STCDR gives reason to ignore these early turns in the TC1, thus avoiding premature long positions.

The STCDR can also be placed in the same sub-graph as the Schaff Trend RSI. Both Trend RSI’s can be compared so that bullish or bearish forecasts are made only when both are rising above 20 or falling below 80, respectively.

Applying a measure of Trend Direction, such as FXS-Trailing Stop, further integrates the analysis and presents a picture of Trend Direction and Momentum together. In the 15-minute USDCHF chart below, the Schaff TCTC1 Trigger is applied (with inputs of 20,23,50,25) to highlight potential trade entry and exit points.

First Buy Point:
The purple STCDR begins rising on the left side of the chart, well ahead of the green STR line. Two TCTC1 buy setup bars are ignored because they occur below FXS-Trailing Stop, which is being used as an indicator of Trend Direction. Only when price closes above Trail are all the indicators bullish. At that time Trailing Stop’s color turns light blue, showing a bullish bias.

Raise Stop:
A few hours later both Trend RSI indicators (STCDR & STR) start falling and a TCTC1 sell setup bar forms. At that point the initial stop on long positions should be raised to the level of the sell setup. Exit the long position if price closes below the black sell setup bar. Note that while the purple STCDR falls below 80, the green STR does not, showing a benefit, in this case, of using both together.

The market does not close below the black TCTC1 sell setup bar, and so the new stop order is not executed.

Second Buy Point:
If you are trading European hours or wake up in North America, a second buy point occurs that can be taken advantage of. Both Trend RSI’s are rising again. USDCHF is above Trail and closes above a blue buy setup bar, signaling the second buy point.