Resolved Question
Why is RSI going to extremes this month ?
I have observed that RSI which normally remains within 75 to 25 range and rarely goes above this range on 5min chart is going to extremes like 12 and 87 very easily these days. Does anyone know why this is happenning. Is this related to the financial year ending because of which banks and institutional traders not trading or something like that ... Please help as my trading system is based entirely on RSI .
about 1 year ago
Best Answer - Chosen by Voters
When the RSI stays in the extreme levels for quite some time, it basically means that price is either in a strong uptrend or downtrend.
about 1 year ago
Answers (2)
Hi,
Could you tell us which currency pair you are talking about?
But in any case, to understand why an indicator act the way it acts, you have to understand how it works:
RSI is an oscillator (its values oscillate in a range, in this case [0;100]), that calculates a ratio between the average of recent gains and the average of the recent losses.
In simpler terms, if the global trend is UP (more candles going up than going down), the RSI will have a high value, while when the trend is DOWN, the RSI value will be low.
The theory behind the indicator is that trends never last, and that the value tends to be over-valuated, leading to a market correction (the price goes to the opposite direction soon after it reaches this "overbought" or "oversold" condition). (this is a really simplistic explanation, it's a little more complex in reality)
If the RSI stays in the extremes, that means the trend is strong and not weakening. If this trend is not cause by a major economic event, you should expect a trend reversal as soon as the current trend starts to weaken.
If you are planning to use this indicator for your trading, you might want to read "New Concepts in Technical Trading Systems" by J. Welles Wilder. It's an old book, but it's worth the read! It's in this book that Wilder, the creator of the RSI, explained how the RSI works.
about 1 year ago
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RSI may be at extremes depending on what pairs you are looking at. Currently, the GBPUSD, EURUSD, and USDCAD have been trending lower the past couple of months, which may explain why RSI is at extreme levels.
By the way, I wouldn't suggest basing a whole trading system entirely on one indicator. You might want to combine RSI with other indicators. If you take a look at Pip Surfer's system in BabyPips.com, you'll see that he combines RSI with Stochastics along with a MA crossover system. I've provided the link to his strategy below. Check it out!
about 1 year ago
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