Trading in the forex market can be overwhelming, especially for new traders. With so many indicators and analysis tools available, it can be difficult to know where to start. However, using just two indicators – the Zig Zag and RSI – can be a simple yet effective strategy for trading forex. In this article, we will explain how to trade forex using nothing but these two indicators.
The Zig Zag Indicator
The Zig Zag indicator is a technical analysis tool that helps traders identify trend changes in the market. It works by filtering out small price movements and highlighting the larger price movements that matter. This indicator is particularly useful for identifying support and resistance levels, which are important for determining entry and exit points for trades.
The Zig Zag indicator draws lines on the chart that connect the high and low points of the price movements. These lines create a zig-zag pattern, hence the name of the indicator. When the price is moving in an uptrend, the Zig Zag indicator will draw a line connecting the low points of the price movement. Conversely, when the price is moving in a downtrend, the Zig Zag indicator will draw a line connecting the high points of the price movement.
The Relative Strength Index (RSI)
The Relative Strength Index (RSI) is another popular technical analysis tool used in forex trading. It is an oscillator that measures the strength of a currency pair by comparing the average gains and losses over a specific period. The RSI can help traders identify overbought and oversold conditions in the market, which can be used to determine entry and exit points for trades.
The RSI is a range-bound indicator that oscillates between 0 and 100. When the RSI is above 70, the currency pair is considered overbought, indicating that it may be due for a reversal. Conversely, when the RSI is below 30, the currency pair is considered oversold, indicating that it may be due for a reversal.
Using Zig Zag and RSI Together
When used together, the Zig Zag and RSI indicators can create a simple yet effective trading strategy. The basic idea behind this strategy is to use the Zig Zag indicator to identify trend changes in the market, and the RSI to confirm whether the market is overbought or oversold.
To use this strategy, follow these steps:
Step 1: Look for the Zig Zag indicator to draw a line connecting the high points of a price movement. This indicates that the market is in a downtrend.
Step 2: Wait for the Zig Zag indicator to draw a line connecting the low points of a price movement. This indicates that the market may be due for a reversal.
Step 3: Check the RSI indicator to see if the market is oversold (below 30). If the RSI is below 30, it confirms that the market may be due for a reversal.
Step 4: Enter a long trade (buy) when the price moves above the high point of the previous price movement, and the RSI is below 30.
Step 5: Set a stop loss below the low point of the previous price movement.
Step 6: Exit the trade when the price moves above the high point of the current price movement.
The same process can be applied for a market in an uptrend. Instead of looking for the Zig Zag indicator to draw a line connecting the high points of a price movement, you would look for a line connecting the low points of a price movement.
Conclusion
Trading forex with nothing but the Zig Zag and RSI indicators can be a simple yet effective strategy. The Zig Zag indicator helps identify trend changes in the market, while the RSI confirms whether the market is overbought or oversold. By using these two indicators together, traders can identify entry and exit points for trades and manage risk effectively. However, it is important to remember that no trading strategy is foolproof, and traders should always use risk management techniques to protect their capital.
