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The EURAUD Closes In On Overbought Levels

The EURAUD has been one of the markets dominant trends, declining 6010 pips from its 2008 high. Most recently the pair has pressed to all-time lows at 1.1604, dropping another 1419 pips from its May high of 1.3029. With prices on the EURAUD pointing considerably downward, trend traders should have a preference to sell. Even though we know we are looking to sell, it can be difficult pinpointing an opportunity to enter into the market. To help with this, indicators know as oscillators can be employed to spot perspective trades. Today we will focus on using RSI in conjuncture with the EURAUD downtrend.

The_EURAUD_Closes_In_On_Overbought_Levels_body_Picture_2.png, The EURAUD Closes In On Overbought Levels

(Created using FXCM’s Marketscope 2.0 charts)

Now that the trend has been established to the downside we can start looking for overbought and levels by applying RSI to our daily chart below. Using RSI with the traditional 14 period setting, is a great tool for this purpose as it is designed to find pullbacks against the trend using overbought and oversold levels. Traders in this example,will wait for a pullback causing RSI to read over 70 and execute as momentum begins to head lower. Circled below, we can see four previous examples of this occurance on a daily chart.

It is important to notice that RSI is not currently in overbought territory. With a reading of 63 traders are still waiting for a candle close to bring the indicator over 70 before considering new sell entries. Once 70 has been reached, traders can prepare for execution when the indicator moves back below these levels.

The_EURAUD_Closes_In_On_Overbought_Levels_body_Picture_1.png, The EURAUD Closes In On Overbought Levels

(Created using FXCM’s Marketscope 2.0 charts)

Using the RSI with the chart mentioned above, my preference is to sell the EURAUD on a turn from overbought territory. Entries can target fresh lows for profit targets under 1.1610 or better. Depending on where RSI creates a selling signal, traders can then extrapolate a 1:2 or better Risk/Reward level.

---Written by Walker England, Trading Instructor

To contact Walker, email WEngland@FXCM.com . Follow me on Twitter at @WEnglandFX.

To be added to Walker’s e-mail distribution list, send an email with the subject line “Distribution List” to WEngland@FXCM.com .

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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