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SCHAFF TREND RSI
Doug Schaff
FX-Strategy
| Name: | Schaff Trend RSI | |
| Characteristic: | Trend Momentum | |
| Parameter Defaults: | MA1 Period | 23 |
| MA21 Period | 50 | |
| RSI Period | 9 | |
| Plots: | STR | |
| 20-Line | ||
| 80-Line |
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 Trend RSI uses a MACD Line (the difference between two exponential moving averages). The resulting indicator can be used as an overbought/oversold measure of trend.
The 4-hour EURJPY chart shows a green Schaff Trend RSI in the middle chart panel compared to a yellow standard RSI in the lower chart panel. The STR is considerably smoother compared to the choppy path of the standard RSI. In addition the STR avoids the false signals shown by early turns in the RSI.
Usage
The STR is generally used in combination with other indicators, such as the Schaff Trend Cycle. When the STR is below the 20-line, traders can wait for it to rise above 20 to confirm a Trend Cycle low. Similarly if the STR is above the 80-line, traders can wait for it to fall below 80 to validate turns in a Trend Cycle indicator.
The behavior of the STR can also guide usage of the Schaff Trend Cycle (TC) Triggers. On the left side of the EURJPY 4-hour chart below, a green TCB buy setup bar forms. However, the STR is not bullish as it cannot rise about the black dotted 20-line. Without bullish confirmation by the STR, traders can ignore that TCB buy setup.
The right hand side of the chart shows a different picture. The STR is rising above 20 when price closes above the TCB buy setup bar. Even so, the long signal generates a small loss when prices close below the purple TCS sell setup bar. With the STR falling below 80, the TCS trigger is confirmed as a sell signal. The sell signal becomes profitable as prices follow the indicators down.
