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RSI: An Indicator To Buy, Sell Or Pause!

November 21, 2018 Posted in Forex Trading News by No Comments

US Midterm Elections Put The Dollar On Pause

In early November 2018, Forex traders were avidly watching the US mid-term elections. These elections can function as an indicator of an impending change in Presidents that will have a significant effect on the US dollar movement. Analysts were watching the technical tools for early indications of what might happen. One of these tools is the RSI, the Relative Strength Indicator.

There Are Opportunities To Be Found In Numbers

This is what the RSI does, it gives you numerical scores to identify the best times to buy and sell. Developed by a trader, J. Welles Wilder, the RSI is a movement oscillator, one of a number of tools used in technical analysis.

So What Does It Do?

It compares any stock’s gains to its losses and presents its findings as a number between zero and 100.

How Does It Do It?

Over a time period, using data points, it is a greatly simplified calculation. It can be described as when the average gain, the average loss, the first RS (relative strength) and subsequent smoother RS’s are divided by the number of RSI periods in the calculation. Wilder recommended the use of 14 points.

Do not confuse the RSI with RS, relative strength charts (John Murphy) or IBD’s relative rankings.

How To Use RSI To Find Opportunities

When do you buy and when do you sell. Simple? It depends on how you analyse and strategise your trading. Simplified, buying on an uptrend and selling on a downtrend is an easy way to describe trading, but it’s never really that simple, as gains and losses stop at some point. The RSI indicators within the conditions of overbought and oversold, highlight where any trend is revising, and with it your opportunities to trade. Wilder recommended using 30 and 70 as the percentiles to indicate when a trade is oversold or overbought. This is still considered the norm today.  

Looking For Trends With The RSI

The RSI is a scale going from zero to 100, so when checking it out for an uptrend, the pointer would be above the 50 mark. Around 50, is a fairly neutral, steady zone. A downtrend would be indicated when the pointer is below 50!

What Would You Use This Info For?

You could look for an oversold reading, with an RSI below 30, in a well-defined uptrend to identify buying opportunities. Or, an overbought reading, above 70, in a well-defined downtrend for selling opportunities within the retracement of the move.

Midterms Created A Pause – A Time To Think, Wait & Watch, Then Decide

As of the beginning of November in the Asian market, the EUR/USD remained unchanged, with an RSI of 54 indicating that they could breakout either way. The AUD/USD was trading slightly higher, with the RSI dropping from 72 to 63. GBP/USD had risen with an RSI of 70, but the Bull Power Indicator had weakened, signalling the upward trend was weak. All indications were that the USD was for that time period paused, and traders were on vigilant standby to see which way the analyses would go, with the RSI being a relevant indicator.

But, also remember that Forex traders should be looking to base their decisions on not just one technical tool, but a marriage of different ones. The RSI should be used alongside other market tools, like the MACD (Moving Average Convergence Divergence) and ADX (Average Directional Index) to make the best profit from any retracement.

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