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RSI Interpretation

RSI Interpretation

2010-02-18 22:43:00
Richard Krivo, Trading Instructor
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Instuctor's Response:



When the RSI is below 30 (oversold) and then closes above 30 it is a signal to go long the pair. Conversely, when the RSI is above 70 (overbought) and then closes below 70 that level that is a signal to sell the pair.  Keep in mind that as traders we use the indicator in conjunction with the chart..  We determine by looking at the chart in which direction we want to trade the pair...that is key.  After we make that determination, it is then  that we use the RSI to time our entry in that direction. 

Newer traders oftentimes make the mistake of thinking that as soon as the RSI enters overbought or oversold territory that the pair in question will almost immediately move in the opposite direction.  The reality is that once a pair enters those areas, the pair can become even more overbought or oversold.  So the answer is to wait for the RSI to move out of those overbought and oversold areas before a prudent trade can be executed.

Take a look at chart below for an example on this...

chart 2 18 10

Also, remember that when implementing these RSI signals the signals that indicate taking a trade in the direction of the Daily trend will be the higher probability trades.

 

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