Technical analysis provides opportunities to traders to make quick decision making while trading in the live foreign exchange market. For proper analysis and correct results, sometimes traders combine different studies and then plot it on the currency chart. A trader should never reply on any particular indicator and must always confirm it to avoid false impressions. They may combine volume with price, or may even correlate two indicators for proper analysis. We will discuss about one such study that is widely used and termed as Stochastic RSI in the article below. This helps in generating large number of signals in the Foreign Exchange market that lead to better decision making.
Explaining Stochastic RSI:
This study combines two most popular technical indicators that are known as Relative Strength Index and Stochastic. Both these indicators when applied individually use market price to provide any results or analysis. But when these are combined and used, they mainly derive value of relative strength index. The major benefit of using this indicator is that it provides more profitable signals related to buying and selling. Moreover it also shows the clear picture of overbought and oversold positions in the market, Relative Strength Index alone.
Interpretation in Foreign Exchange Markets:
A buy signal is generated when the oversold line is crossed by the stochastic RSI. Similarly it is advised to sell when overbought line is crossed by stochastic RSI line. It applies stochastic oscillator to the relative strength indicator to measure the value of any change in RSI. This indicator increases the sensitivity level of normal RSI indicator that measures average change in price of forex over a period of time. Stochastic RSI generally fluctuates between zero (0) and one (1). When the value of RSI is recorded at very high levels then the value of stochastic RSI is expected to be 1, and in case of vice versa, it will be 0. All the readings that are above the value of 0.8 indicate an overbought situation in the market, and when it is below 0.2, and then an oversold position is prevalent in the Foreign Exchange market.
Identifying the trend:
Stochastic RSI as an oscillator is very volatile, that very frequently shows overbought and oversold positions in the market. In case of trend identification for shorter period, it helps in lengthening the calculation period by applying short period moving average. Thus data gets smoothened. The use of this indicator increase the number of signals generated, as compared to RSI alone. It is very necessary to apply other technical tools and indicators to confirm the numerous signals generated by stochastic RSI, as it might not always show the correct path. Suggested indicators include usage price patterns, on balance volume, accumulation distribution line, support resistance levels and gap analysis.
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