Overbought And Oversold Forex Strategy

Trading Forex usually requires knowing technical analysis for currency pair price. Many technical indicators exist which you can use for technical analysis. In the forex currency trading strategy shown here we apply 2 main signs and one more indicator that is used as confirmation for the price trend.

The 2 indicators that are used in the strategy are pivot point analysis and stochastic sign. The confirmation sign is the relative strength index (RSI). Let us see 1st an overview of these indicators 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 determining support and resistance level. The support level is defined as a level the currency pair cannot go below it for a large time frame. Similarly, the resistance level is understood to be a level the currency pair can not go above it for a large time frame. The pivot point analysis defines numerous levels at different strengths. The higher support or resistance levels the strongest level which means it’s much more likely that the currency price reverse direction at the level. This is actually the first indicator in our forex currency trading strategy.

The stochastic is an sign 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 continuously climbing within the specified period, the stochastic will be high for a large period and this is known as overbought. To reverse is true and can lead to oversold condition. If this sign is more than 80 % for large period, we claim this is overbought condition. Also when it is below 20% it is oversold condition. This is actually the second indicator that will be used in our forex trading strategy.

The RSI is like the stochastic but uses different data. It can be used to know 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 can be a confirmation indicator in our forex trading strategy.

The forex currency trading strategy given uses the pivot point analysis and the stochastic as the most important indicators. The trader must 1st check the stochastic sign. If it is high for long time (especially more than 80%) then it’s overbought condition. In the same way, if the stochastic is low for reasonable length of time(less than 20 %), then it’s oversold condition. The trader must expect a reverse in the price when those 2 conditions are seen.

Once overbought or oversold conditions emerged on the price curve, the trader can see the pivot level from which the price reaches. The greater the level the price reaches, the more likely that the price will reverse. As an 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 very strong which will make many pips.

The entry point of the trade 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 monitored to determine when to enter a trade. When it is above 50 %, the price is going high. If it less than 50 %, the price is going low.

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