If the momentum in price movement is increasing to the forex random entry system, an over extension will lead the oscillator into the overbought zone, generally the 70 level. It’s at this point, theoretically, the traders will see the extension in price and begin to unload long positions.
At this point as well, counter trend traders will look to short the market. If price momentum is to the downside, the RSI can reach the 30 level and at this point, theoretically, traders will see a market that is oversold and sellers will look to take profits. Other traders with other methods and thoughts about price will look to buy into the market. The RSI was created by Welles Wilder and many trading strategies have been designed around this indicator. From trading oversold and overbought levels to trend determination via the 50 level, the RSI momentum indicator makes up the backbone of many different types of strategies. If trading Forex, this trading strategy can be used on any currency pair that is actively traded. Generally, I still with the majors and add in a few others such as EURJPY and GBPCHF.
We Need A Trending Market This trading strategy will rely on a market that is trending. There are trading strategies for non-trending markets but for this, we want to latch onto a move that leads to a large potential swing trade. If price movement is cutting back and forth through the moving average, we will consider that to be a range bound market. If there are gaps between the moving average and price, and price is predominately on one side of the average, we will consider that to be trending. Note that after you have objectively identified a market that is ranging, you can often mark of the support and resistance levels of the range. When price breakouts out of that range with strength and conviction, you may start looking for trending price action.
You can often see the momentum candlesticks breaking from either the support or resistance level that which will tip you off, using price action, that the range is completed. You can see in this graphic that when price chops back and forth through a moving average, you are looking at a market in consolidation. That’s not a bad thing if you are looking for break out trading opportunities with your trading system. A gap between the moving average, in our case the 20 SMA, we are looking at a market that points towards a trending market and is what we need to see for this trading strategy. You can use other technical analysis measures to determine a trending or ranging market however price that is not making a trending price pattern, is generally consolidating. Trending Market But Uptrend or Downtrend The 20 SMA with RSI swing trading strategy in a trending market has the potential to add hundreds of pips to your count.