British Pound (CME:B6M14)
Today’s analysis of the British Pound is intended to provide clarity on a unique interpretation of the RSI indicator and its application to trading. More often than not, traders will use the standard 70-30 levels as “overbought” and “oversold” signals; however, what most traders forget to take into account is that when a market is trending, the inputs used to calculate this RSI reading will naturally be skewed, either positively in a bull trend or negative in a bear trend. To compensate for this, one possible solution is to adjust the OB/OS parameters based upon the current market environment. With the British Pound pushing into new contract highs, it appears clear that the market is in a near-term bullish environment. As a result, traders could look to the 80-40 levels as their OB/OS thresholds to compensate for the positive skew of price data. Interestingly enough, the past four times that the RSI has dipped below 40 have all offered valid trading opportunities.
Certainly “past performance is not indicative of future results;” however, there does appear to be a pattern forming here, and if price continues to trend higher, this pattern may prove to be reliable. Technical structure is rather straight forward and, based on previous price action, the higher probability opportunity appears to be on the long side of the market. Traders should continue to look for valid buying opportunities on pullbacks into support, especially if these pullbacks coincide with a sub-40 reading in the RSI. Until price begins to breakdown and make new relative lows on the chart, the bull trend will remain in control of this market. For more on RSI strategies and how to implement them into your trading strategy, feel free to contact me directly.
British Pound 30-minute Bar Chart (e-Signal)