Over on this thread at the DailyFX forum is a discussion on RSI. Not exactly a new topic, but one to keep in mind nonetheless, because the way RSI should be used -- no, the way EVERY technical indicator should be used -- has more to do with psychology and what others are doing rather than math.
The numbers in RSI are meaningless. What is important is the relationship between RSI and price. For instance, in the chart below, we see EURGBP in an ascending triangle. Note RSI though; it's falling. Prices are rising, and RSI is falling; this occurrence, known as RSI divergence, often precedes a reversal in the trend. It suggests that the current price trend lacks the strength needed to sustain it.
In a scenario like this one where we have conflicting indicators -- ascending triangle suggests upwards price movement, although RSI divergence suggests otherwise -- it's often better to look at a wider time frame (which you should be doing anyway). The EURGBP dailies, for instance, show a symmetrical triangle with no RSI divergence. Consider:
So based on that, it looks like EURGBP may be inclined to break upwards.
But more importantly, what do you think? Does RSI have any value outside of being able to identify moments of divergence? Am I on target with this article, or does it make you think I've been hitting the crack pipe a bit too hard lately?
