RSI indicator vs. price action

RSI is yet another popular indicator, many traders think somehow "magically" some sort of insight will be them, that is not available elsewhere. This is simply a misconception and the "myth", we will dispel the RSI indicator of real time viewing the daily chart of the EURUSD. Read to see how the RSI fairs as an analysis tool vs. what probably is the best Forex System; Price action.

First of all let us discuss works just like the RSI indicator:

The RSI is a technical momentum indicator, of the extent of the recent gains to recent losses in the attempt, overbought and oversold conditions for a Forex currency pair determine contrasted. The RSI ranges from 0 to 100, is regarded as asset be overbought, as soon as the RSI approaching the 70 level, so that it can always overvalued and is a good candidate for a retreat. As well, as the RSI of 30 approaches, is there an indication of the asset oversold and undervalued are therefore likely to be received.

• The main problem with RSI

Now the RSI is, which means oscillating indicator, that it "predict" market reversals between a and a B item in an attempt oscillates. The obvious and very real problem with these oscillating indicators is, that they produce signals to sell if a market is be tends continuously heavily to buy when a market is strong after trending down under way at the top and signals. Now, knows everyone around the markets for a while has been, that is, if a market heavily trend follows, so that the last thing you want to do is the most lucrative time for trade even in trying to the top or bottom of a strong trend to pick up by looking at confuse some indicator as RSI.

• A clear example of RSI vs. price action

We take a look at the current daily chart of the EURUSD as of 1st April 2011. We have applied a standard RSI indicator to this diagram. You show it to discuss a few things here, which clearly price action will vs. price action the clear winner in the battle of RSI.

First of all, the market significantly in an uptrend is once since early January this year. Because we would like to take pieces from the trend, because that is the most efficient and most effective way to make money in the markets, we should be just long transactions while a market test latest trend. Now, if you are a true believer in the RSI, you would watch as it implies the 70 level, that which "overbought" market approached one, that you should sell. The problem with the entire concept which "overbought" and is "oversold", a market may remain overbought or oversold for a very long time, so that you can see it is all related. Try a losers game is tops and floors to get, and the best way to identify important market turning points is anyways with simple price action setups.

See next we there were at least two quality price-action setups, that market could have gotten you in this trend in the last few months. If you know what to see there were based on simple price dynamics, you would have no desire to be confused with "swing" indicators such as RSI, stochastics, or one of the rest of them.