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The EURUSD pair achieved parity in mid-July, meaning that traders could buy €1 for $1. This was the first time that the pair was at parity in two decades! But analysts expect the trend to reverse soon, with the ECB continuing its conservative interest rate hikes, while the US Fed charges on with unexpectedly high increases.
How do traders keep track of market trends and their strengths? A popular way to do so is by using the Relative Strength Index (RSI). RSI is a momentum indicator that measures the magnitude and speed of an asset’s price changes to signal overbought or oversold conditions in the market for that asset.
How to use the RSI?
The RSI is displayed as a line graph that varies from 0 to 100. The indicator is a signal of overbought conditions when it is above the 70 level and oversold when it falls below 30.
So, traders wait for the RSI to move below the 30 mark before entering a buy position. Since this level implies an oversold market, the price is expected to recover going forward. Similarly, when the RSI moves above 70, traders tend to enter a sell position, expecting the price to fall due to the overbought condition.
What are overbought and oversold levels?
Before starting to use the index, you first need to know what overbought and oversold levels mean.
An overbought level means the point when the asset is said to be trading above its fair or intrinsic value. Therefore, the price is likely to correct in the near-term period, meaning that it will decline. When the asset is considered oversold, it is trading below its fair or intrinsic value. So, the correction will be an upswing in price.
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Vantage is a global, multi-asset broker offering clients access to a nimble and powerful service for trading CFDs on Forex, Commodities, Indices, Shares.
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