Smoothed RSI – What It Is & How to Trade with It

Smoothed RSI – What It Is & How to Trade with It

What is Smoothed RSI?

The Smoothed RSI is a modified version of the Relative Strength Index (RSI) that applies an additional smoothing function (typically an Exponential Moving Average (EMA) or Simple Moving Average (SMA)) to reduce market noise. This helps traders focus on longer-term momentum trends while filtering out short-term fluctuations.

The Smoothed RSI formula is:
Smoothed RSI = SMA (RSI, n-periods)

Where:

• RSI = Standard RSI calculation over a selected period.
• SMA (RSI, n-periods) = Simple Moving Average applied to the RSI values.

Key Features of Smoothed RSI

• Reduces noise for clearer trend signals.
• Maintains overbought (above 70) and oversold (below 30) levels.
• Works well for longer-term trend analysis.

How to Use Smoothed RSI in Forex Trading

1. Overbought & Oversold Strategy

Smoothed RSI helps traders identify reversal points with less noise:

• Buy Signal: When Smoothed RSI drops below 30 and starts moving up.
• Sell Signal: When Smoothed RSI rises above 70 and starts moving down.

2. Smoothed RSI Crossover Strategy

When a faster Smoothed RSI (e.g., 10-period) crosses a slower Smoothed RSI (e.g., 50-period), it signals potential trade opportunities:

• Buy when: The 10-period Smoothed RSI crosses above the 50-period Smoothed RSI.
• Sell when: The 10-period Smoothed RSI crosses below the 50-period Smoothed RSI.

3. Smoothed RSI Divergence Strategy

Divergence between price and Smoothed RSI can indicate a trend reversal:

• Bullish Divergence: Price forms a lower low, but Smoothed RSI forms a higher low (buy signal).
• Bearish Divergence: Price forms a higher high, but Smoothed RSI forms a lower high (sell signal).

4. Smoothed RSI with Moving Averages

Pairing Smoothed RSI with a moving average (e.g., 50 EMA) helps confirm trade signals:

• Buy when: Smoothed RSI is above 50 & price is above the 50 EMA.
• Sell when: Smoothed RSI is below 50 & price is below the 50 EMA.

Pros and Cons of Using Smoothed RSI

✅ Pros:

• Reduces market noise compared to standard RSI.
• More reliable in trending markets.
• Works well for longer-term trend confirmation.

❌ Cons:

• Can lag in fast-moving markets.
• Requires additional confirmation from other indicators.

Final Thoughts

The Smoothed RSI is a powerful variation of the RSI that enhances trend-following and momentum trading while filtering out short-term fluctuations. When combined with moving averages or divergence analysis, Smoothed RSI helps improve trade accuracy and decision-making.