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RSI:  Overbought/Oversold

RSI: Overbought/Oversold

Richard Krivo, Trading Instructor

Student's Question:Looking the charts regarding the RSI indicator, when I go long because the indicator reached 30, it still keeps dropping. What am I doing wrong?Instructor's Response:Keep in mind that because the RSI reaches 30 or even goes below 30 (an area referred to as being Oversold) does not mean that the pair is immediately going to begin a bullish move to the upside. Being in oversold territory is not a signal to enter a long position and buy the pair. When a pair is "oversold" it can become even more "oversold". Take a look at this historical chart of the AUDCHF below for a visual on this...

Note that after the RSI touched 30, the pair still dropped almost 200 pips. Based on the RSI, the time to take a long position is after the RSI moves back above 30.The strongest buying signal that is generated by the RSI is when the pair has been below 30 and then moves above 30. The strongest selling signal that is generated by the RSI is when the pair has been above 70 and then moves below 70. These movements back above 30 and back below 70 are critical when interpreting this indicator and using it to time an entry.

As is true with any indicator, the higher probability trades will be those that are signaled in the direction of the Daily trend.

To learn more about the RSI indicator, if you have a live trading account with FXCM, when your Trading Station is open, click on the Research button at the top of the Trading Station. When the next page opens, click on the Trading Course button. You can then scroll down through the 15 listed subjects until you reach RSI and click on it. You will then be able to view and listen to 4 lessons focusing on the RSI indicator.

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