Using the RSI to Trade in Ranges: EUR/USD

The RSI can be a powerful tool when used in combination with other technical tools

Charts (6)

With the plethora of tape bombs over the last few days and weeks regarding the on-again/off-again negotiations regarding both Brexit and the US fiscal stimulus package, traders have become somewhat immune.  It seems that no longer do comments such as “walking away from the table”, “close to a deal”, and “ready to put pen to paper” matter.  Until something is actually done, in writing, will the markets pay attention.  Some of this can be seen in the price action of the EUR/USD over the last few months.


Tradingview, City Index

From the end of July until today, a 240-minute EUR/USD chart shows that the pair has been trading in roughly a range of 400 pips between 1.1615 and 1.2010.  RSI indicators, in combination with other technical tools, can be used to look for spots to enter a trade.  The RSI moves on a scale between the range of 0-100.  When the line moves above 70, the RSI indicator is considered overbought, and sellers may soon take control.  When the line moves below 30, the RSI indicator is considered oversold, and buyers may soon take control.  The arrows in the above example show where the RSI moved into overbought or oversold conditions, and price soon reversed direction.

All oscillators should never be used alone.  This is true for the RSI as well.  There is potential for overbought to become overbought”er” and oversold to become oversold”er”.  It is best to use them in combination with other technical indicators.  When there is a confluence of indicators, traders will have more confidence to enter a trade.  Trendlines, support and resistance, moving averages and divergence can be used as criteria to both enter and exit trades.

As an example, on July 31st:

Tradingview, City Index

1)      The RSI moved into overbought territory and….

2)      The RSI is diverging price.  EUR/USD now moves onto the radar. 

3)      Price is just above  1.1900 (psychological round number resistance). 

4)      The next 240-minute candle is a bearish engulfing candle. 

If one were to enter a short EUR/USD trade at the close of the bearish engulfing candle, 1.1858, a target could be the 21-Day Moving Average near 1.1775, which also near horizontal support. 2 candles later, price hit the target and the RSI was back in neutral territory.

The RSI can be a powerful tool when used in combination with other technical tools, especially in trading ranges.  Along with proper risk/management, the RSI can help traders make better decisions.

From time to time, GAIN Capital Australia Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.