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RSI:  Overbought/Oversold

RSI: Overbought/Oversold

Richard Krivo, Trading Instructor

Instructor's Response:

Nicely done on this interpretation of the Relative Strength Index...

chart 2 3 10



Once the RSI is below 30 as it appears on the chart above, it can remain there for quite sometime. It is important to wait, as you rightly mention, for it to come back above 30 to provide an entry signal.  

Too many traders interpret the RSI being below 30 and in "oversold" territory to mean that it is time to immediately go long at the moment the oversold reading occurs.  What many traders do not realize is that even though a pair is oversold, it can become even more oversold.  The RSI can meander around below 30 with the price continuing to drop and thus wreaking havoc on any trader who took a long position as soon as it fell below 30.

It is critical to WAIT for it to move back above 30 before taking a long position.

Conversely, when the RSI is above 70 and in overbought territory, a trader must wait until the RSI moves below 70 to signal a short entry.

When trading this market, patience is definitely a prerequisite.

 

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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