Overbought And Oversold Forex Strategy
Trading Forex usually requires understanding technical analysis for currency pair price. Numerous technical signs exist which you can use for technical analysis. In the forex currency trading strategy shown here we apply 2 main indicators and one more sign that is used as confirmation for the price trend.
The two indicators that are used in the strategy are pivot point analysis and stochastic sign. The confirmation indicator is the relative strength index (RSI). Let us see 1st a summary of these signs and see then how are they used together in the trading strategy to make decision on whether to buy or sell.
The pivot point analysis requires resistance level and determining support. The support level is understood to be a level the currency pair cannot go below it for a large time period. Similarly, the resistance level is synonymous with a level the currency pair can not go above it for a large interval. The pivot point analysis defines numerous levels at various strengths. The higher support or resistance levels the strongest level which means it’s more likely that the currency price reverse direction at the level. This is actually the 1st sign in our forex trading strategy.
The stochastic is an indicator that determines the degree of decrease or increase for a given period. The higher the value, the more the currency price increases over the period. The lower the value, the less the price is going. If the price is always climbing within the specified period, the stochastic will be high for a large period and this is called overbought. To reverse is true and will result in oversold condition. If this indicator is more than 80 % for large period, we say this is overbought condition. Also if it is less than 20% it is oversold condition. This is the second indicator that will be applied in our forex trading strategy.
The RSI is like the stochastic but uses different data. It can be used to find out the overbought and oversold conditions. It is also used to find out the price trend. If it is more than 50 % the price is going high and the reverse is true. This is a confirmation sign in our forex currency trading strategy.
The forex trading strategy given uses the pivot point analysis and the stochastic as the primary indicators. The trader must first take a look at the stochastic indicator. Whether it is high for long time (especially more than 80%) then it is overbought condition. Also, if the stochastic is low for reasonable length of time(less than 20 %), then it’s oversold condition. The trader must expect to have a reverse in the price when those 2 conditions are seen.
Once overbought or oversold circumstances are seen on the price curve, the trader can see the pivot level of which the price reaches. The more the level the price reaches, the much more likely that the price will reverse. For example, if the price is overbought and we see that the price reaches the R3 level or a higher resistance level, then a really strong chance that the price at certain point will reverse. The price also at this condition will change really strong which will make a lot of pips.
The the trade entry point at this forex strategy can be driven by the RSI. If the price is oversold or overbought and reached the highest pivot level (or break out that level) the RSI can be checked to find out when to enter a trade. If it is greater than 50 %, the price is going high. If it lower than 50 %, the price is going low.
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