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How to Analyze Ranges with RSI

By , Forex Trading Instructor
29 August 2012 18:00 GMT

In between times of market volatility, traders may find extended periods where currencies are trading sideways. These periods are defined as a ranging market and seen on the graph as trading between established levels of support and resistance. Below we can see an example of a defined 46 pip range range on the CADCHF currency pair. Our pertinent price points include resistance at current highs near .9715 and support at a price level near .9669. With these areas defined we can then proceed with a trading plan to trade these pricing levels. For this we will once again turn to the RSI oscillator.

How_to_Analyze_Ranges_with_RSI_body_Picture_2.png, How to Analyze Ranges with RSI

(Created using FXCM’s Marketscope 2.0 charts)

Yesterday we discussed using RSI in trending conditions. But the truth is, that RSI can be used just as well in a range . In a ranging market we want to time our entries when support / resistance points line up with RSI and overbought / oversold conditions. Timing is key, and we can see on the graph below that the previous trading signal allowed us to sell resistance as RSI moved from overbought levels. A s price declines traders can look for a fresh signal to buy the CADCHF at support if RSI becomes oversold.

The great thing about ranging markets is that you do not have to have a specific market or trend bias. Traders have the ability to trade the range until price breaks out from support and resistance levels. Due to the possibility of a breakout, range traders can use half the distance of the current range to asess potential stop levels. In this example traders would look to keep a minimum stop of 23 pips from their point of entry.

How_to_Analyze_Ranges_with_RSI_body_Picture_1.png, How to Analyze Ranges with RSI

(Created using FXCM’s Marketscope 2.0 charts)

Using the RSI with the chart mentioned above, my preference is to buy the CADCHF on a return from oversold levels near .9668 or better. New orders can target range resistance at .9715 with stops placed outside of support as described above. Depending on where RSI creates a signal to buy, traders can then extrapolate a 1:2 or better Risk/Reward level.

Alternatives include price breaking out of the mentioned range.

---Written by Walker England, Trading Instructor

To contact Walker, email WEngland@FXCM.com . Follow me on Twitter at @WEnglandFX.

To be added to Walker’s e-mail distribution list, send an email with the subject line “Distribution List” to WEngland@FXCM.com .

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29 August 2012 18:00 GMT