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Question on the Relative Strength Index

Question on the Relative Strength Index

2010-04-20 21:59:00
Richard Krivo, Trading Instructor
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Instructor's Response:

Nicely done...

 
Shorting a pair in the direction of the Daily trend using the RSI to fine tune the entry is a higher probability way to trade.
 
Regardless of the time frame of the chart that you use, the RSI will give accurate feedback...relative to the time frame of that particular chart
 
Just as the charts themselves will provide more accurate trading information as the time frame becomes longer, so will the RSI (or any indicator for that matter) provide more accurate information as the timeframe of the chart on which it is placed becomes longer.  Also, take note of the fact that the RSI on both pairs is indicating negative divergence...see the yellow line on the charts below.  In other words, upside momentum is weakening.  Given that, along with the downtrend on each pair and the fact that the RSI on each has recently been above and 70 and moved below that level, is a strong indication for a short entry.
chart 4 20 10
 
One cautionary note...
 
Given the volatility of the GBPJPY a stop deeper than 50 pips may be warranted. The ATR, Average Trading Range, on a Daily chart for the GBPJPY is 163 pips. A swing of 163 pips over the course of a day can potentially trigger a 50 pip stop in fairly short order.

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