Kathleen Brooks on Forex: A Simple Approach to Trading Foreign Exchange Using Fundamental and Technical Analysis by Kathleen Brooks

Author:Kathleen Brooks [Brooks, Kathleen]
Language: eng
Format: epub
Tags: Business & Economics, E-Commerce, Online Trading
ISBN: 9780857193117
Google: 6oMbb34Hva8C
Publisher: HarrimanHouse
Published: 2013-03-27T20:21:58+00:00

Confirming the trend

Sometimes clouds and candlesticks are not enough and I need to find a way to confirm if there is an uptrend or downtrend. This is where the relative strength index (RSI) comes in handy.

The relative strength index is a measure of momentum in the market and is the rate of the rise or fall in an asset’s price. It is the ratio of higher closes to lower closes, and is typically significant in the range 20 to 80.

The RSI is useful for two reasons. Firstly, it can help to confirm the start of an uptrend; typically this happens if the index is particularly oversold and hovering around the 20 mark. The second use for the RSI is that it can show when the market is overbought; at this point the index is hovering around the 80 mark.

Figure 2.11 shows how the RSI can be used to tell when a currency cross is overbought or oversold. On two occasions, once in September and once in December, the RSI moved into overbought territory (above 80), which was followed by a sell-off in EURUSD.

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