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Verifying Forex Entries Using RSI

 Nizar Harb Nizar Harb

Currencies can be extremely volatile. Their nonstop up and down movements can make it difficult for a trader to know when exactly to enter a market and what course of action to take after he does so. Technical analysis can help with tools that indicate suitable entry and exit points. There are several indicators available and one of the most widely used is the Relative Strength Index or RSI. The RSI indicates when markets might be overbought or oversold, thus showing investors when a reversal is due in the direction price is moving. This can be used in conjunction with other tools to gain more confidence about the anticipated reversal. The following paragraphs will show a person can go about verifying forex entries using RSI:

The Relative Strength Index

Everything starts by looking at the price charts with the appropriate timeframe. It will take practice but a person should be able to spot patterns that indicate that the price has been going too far in a direction and may be due for a reversal. This theory may be verified by computing for the Relative Strength of the asset where:

RS = Average of X days of UP closes / Average of X days DOWN closes

After getting the value of RS, we can plug this in the formula below to get the corresponding index:

RSI = 100 -- [100 / (1 + RS)]

Overbought and Oversold Positions

The key values of RSI are 30 and 70. These are indicative of oversold and overbought positions, respectively. Note that there is nothing magical about these figures except that they tend to hover around the time when market sentiment flips to correct the issue in the asset price. These re nothing but good estimates but people may find them prone to false expectations. Some traders prefer to use the values 20 and 80 which indicate greater strength at the extremes. By doing so, they wait until conditions are undeniably ripe for an entry.

Looking at the Trading Volume

The RSI alone cannot tell the whole story. After all, it is just a singular number measuring a specific signal. A wise trader will look for other indications of market sentiment such as the trading volume at the 30 and 70 marks. Is it still high, meaning investors continue to be interested in the asset, or it is beginning to slow down, meaning that interest is finally waning? If the buyers are thinning out, then one can expect the law or supply and demand to work itself in resulting in a fall in prices.

Verifying forex entries using RSI is an excellent starting point for traders. As there is nothing 100% accurate, it will still have to be supported by other technical indicators and market signs to figure out the exact optimum entry point. Studying old charts and previous movements at the projected levels (30/70 or 20/80) of reversal will help. Investors may find that the assets follow these figures on the dot or they may take a little more time to undergo correction.