Does RSI indicator really work in Forex Trading?
While beginning to learn Trade, almost all the traders must have learned about the most common indicator known as RSI. RSI or relative strength indicator tells whether the financial asset is in the overbought or oversold zone. It is a momentum indicator. J Welles Wilder Jr introduced it in 1978.
It was designed for technical analysis of stocks. Many traders also call it a trend reversal indicator. It is measured in the scale of 0–100 and provides the average value of 14 periods. Its value can vary between 0 and 100. Any value above 70 indicates the overbought condition for the asset, and traders expect trend reversal or a pullback in the price of the asset. Any value below 30 is considered as an oversold condition for the asset and traders expect trend reversal or a small short-covering rally to happen.
This indicator was primarily designed for the stocks, but soon traders started using it for predicting the price movement of various other assets. Many pro traders combine this indicator along with other indicators, to create a trading strategy. At the same time, price-action traders use it for predicting a breakout or breakdown of major resistance or support. They also use for predicting false breakout or breakdown.
Spot Forex trading was launched somewhere around 1996. Currency Derivatives were launched in 2008 in India. Does this indicator work well with Forex trading?
The price action, trend reversal, support and resistance do not work in most of the currency pairs. The traders coming with trading experience in other financial assets try to figure out overbought and oversold zones even for the currencies. Let me tell you the basic fact; we are trading between two currencies, where one currency will appreciate, while others will depreciate and that is the principle. There are no overbought or oversold zones in currency trading. Banks are the real operator in Forex Market. In one of my article, I have explained how the banks are the main operator in the currency market.
Perhaps you will also like to read about the possibility of a currency depreciating against the other currency more than 20% in a single day.
In another article, I have explained why exchanges do not put circuit breakers in the currency futures.
Based on these three articles, you would be able to understand that there is no bottom or top in the Forex Market. Bottom and Tops are decided only by Banks. So how to determine oversold and overbought conditions in these situations? So how will this indicator tell us when the currency pairs are trading in overbought or oversold zones?
Though USDINR has been in a long trend since 2008, it has been trending in a pattern where it moves in an uptrend, then pull back happens followed by consolidation and again the uptrend starts. But still in this case, from time to time RBI intervenes to ease down the volatility and provides liquidity, in such situations again the RSI has failed most of the times. When I began my Forex trading career, like others, I started with this indicator only with 15 min TF. I used to trade in all the Four INR based pairs. I must admit that I failed every time whenever I relied on this indicator.
Well, so far I have not traded in cross-currency pairs, but based on the global trader’s experience, the most manipulated currency pair is the EURUSD followed by EURCHF and USDJPY. All the major currency pairs where USD is involved manipulation is done to some extent by almost every bank. This strengthens my opinion against the use of RSI technical indicator in Forex.
I must say that, if you are using RSI in the Forex markets, then you are relying on an indicator which will deceive you every time. In the Forex markets, whenever a pair starts to trend it will trend even beyond the concept of overbought or oversold zones, the reason is simple, there is something called Interbank where banks trade on these currency pairs. Almost every bank in the world does trade via Interbank link.
In my next article, I will share some examples, where RSI fails in Forex market.
Any comment, feedback or suggestion is welcome.
Disclosure : The article contains affiliate links from canva. I may earn small commission when you click on the links at no additional cost to you. As an canva affiliate I earn only from qualifying purchases.
