Relative Strength (RSI): What it said about the EUR-USD

One of the most commonly used technical indicators is relative strength (RSI).  It’s simply a momentum oscillator that measures the speed and change of the price of a stock, an index, an ETF, even currency.

When it moves to or above its 70-line, we have an overbought condition.  When it moves to or below its 30-line, we have an oversold condition.  Simple enough.

Of course, you’d be nuts to use it as standalone indicator.

While it provides valuable knowledge, it – just like any indicator – must be confirmed with other momentum indicators.  For example, if RSI is at its 70-line (overbought), yet Money Flow (MFI) and Williams’ %R (W%R) are stuck in oversold territory, we have to stop and question the validity of what we’re seeing.

It’s why confirmation is essential.


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Again, though, it’s valuable.  In fact, look at what happens about 80% of the time when RSI on the EUR-USD even touches the overbought 70-line, or the oversold 30-line over the last two years.  The currency bounces and becomes profitable for any one trading the oversold or overbought condition.

In June 2017, for example, RSI was again at the 70-line, as the currency challenged an historical top around 1.13.  That told us it was overbought.  But we’d never short the currency just on RSI.  So we then move to confirm with other indicators.

Along with RSI, we can clearly see that MACD is over-extended, as well.

Even Pring’s Know Sure Thing (KST) is over-extended.  Using those two indicators to confirm what RSI told us in June 2017, we could feasibly trade the short side of the currency.

The last time KST was this over-extended was in August 2015.  MACD was also very much overbought.  RSI was slightly above its 70-line. Shortly after the EUR-USD plunged from a high of 1.171 to a December 2015 low of 1.056. 

Another way to confirm potential downside is by arguing that the EUR-USD is still stuck in a two-year consolidation pattern ranging between 1.051 and 1.161.


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