When I look at the 5 min EURUSD chart, and RSI shows a value of 47 and on the 30 min chart it shows a value close to 30.
I dont understand how a pair can be oversold in one time frame while another time frame shows a different opinion for the same pair.
Why is this ?
pretty spooky huh?
haha. Just looked it up on wikipedia, but missing the maths out.
The Relative Strength Index (RSI) is a trading indicator in the technical analysis of financial markets. It is intended to indicate the current and historical strength or weakness of a market based on the closing prices of completed trading periods. It assumes that prices close higher in strong market periods, and lower in weaker periods and computes this as a ratio of the number of incrementally higher closes to the incrementally lower closes.
that explains it . . .
Well, 30 minutes is 6x 5 minute candles, so what may look like a market top on 5m will look like a single long candle on the 30m.
Yes, it is the previous amount of time units, closing price which it is worked out on.
Im interested to see how it works across the different time frames. Still cant quite get my head round how it can be undersold in one and oversold in another, and then use this as an indicator to buy or sell.
tricky one
Hi,
As many will know: I spent the better part of two years studying Wilder’s trading systems and methologies so I reckon I’m qualified to note the following:
RSI has little to no meaning on any timeframe other than the daily timeframe. In addition: RSI, in my opinion, is far more reliable in indicating overbought and oversold conditions in the equities and commodities markets (Wilder was a commodities trader only). I question it’s relevance in trading forex pairs. Note also that an instrument can stay overbought or oversold for extremely long periods. In other words: simply because RSI is indicating overbought or oversold conditions is no guarantee that the price will reverse. As a matter of fact: if you look very carefully the more overbought or oversold RSI is the stronger the trend in the relevant direction. RSI’s most reliable signal is divergence between itself and price. It can also be used to pinpoint chart patterns (triangles and pennants and the like for example) that sometimes are not quite as obvious on a price chart. RSI is also monitored by many analysts and traders the world over and thus price movements relative to RSI (may) become ‘self fulfilling prophecies’ as it were.
I hope this helps.
Dale.
Lets say for example you have your rsi set on 14 periods, it creates its current position based on averages of the last 14 periods.
It actually uses the average number of positive price changes vs average number of negative price changes in its calculation.
Imagine a price fall lasting 6hrs followed by a price rise lasting 1 hour.
On the 30 minute chart the 14 periods RSI amounts to 7 hrs of price action so even though there may be a price rise over the last 1hr it gets averaged into the previous 7hrs which included the 6 hr fall.
On the 5 minute chart that same 1hr price rise amounts to 12 of the 14 periods, almost all of it, so in those circumstances the 5 minute RSI will show a higher value than the 30 minute RSI
Circumstances can also arise where you have a overbought signal in the short timeframe chart and an oversold signal in the large time frame chart, and both can be traded succesfully, on the large timeframe chart bigger fluctuations in price are absorbed by each bar so you can go long on that signal, while in the short time frame chart , the overbought signal would be based on a small price fluctuation so trading on it might be simalar to a scalping move with a small profit on that little upswing while the 30 minute chart and its RSI is responding to a longer term downtrend.
Im inclined to agree with Dpaterso though, I have spent time on the RSI and I also found its biggest failing is its tendancy to stay in the overbought or oversold condition for a long time thereby rendering those signals very unreliable.
I thought I’d give you this link. It’s a really simple trading system based on RSI:
I’ve traded this same system (it’s actually also in a book by the same authors) with much success. My only issue with it is that I find that you get stopped out at breakeven far too often for my liking but it this does not mean that overall it’s not profitable i.e. it just does not fit my trading style / personality is all. Again though (and even although the authors are both currency traders only) this system performs better when used to trade the major indices, equities, and commodities than it does when being used to trade forex pairs (again this is just my opinion based on extensive testing).
Also: make sure that your RSI is being calculated CORRECTLY!!! Wilder used a smoothing technique in an effort to eliminate false signals. Some platforms simply ignore the smoothing while others may simply use and EMA in the calculations instead of Wilder’s smoothing technique. Essentially the elimination of Wilder’s smoothing technique give rise to many false signals with this system but, at the same time, the amount of trade signals given is also reduced considerably.
One other thing: I read an interesting technique the other day that may improve the performance of this system (or should I say that more signals will be generated without these signals necessarily being false signals). You need to take a look at the RSI readings PARTICULAR to the instrument being traded. In other words: one instrument may almost always reach of exceed the 30 / 70 limits while another may very rarely reach those limits before price turns. So you may find that for a particular intrument RSI limits of, say, 35 / 65 may generate good or better signals and you may be able to initiate more, valid, trades.
Regards,
Dale.
The confusion might be because you don’t really understand what indicators like RSI actually are. They are just mathmatical formulas, and aren’t really showing if the market is oversold or overbought.
All the 5 minute RSI is really telling you is that 100 – (100 / 1 + Average Gain / Average Loss) = 47. 
Stick different numbers in and you’ll get different answers, and not a bit of it really means anything…
thanks for the answers guys.
I do understand what they are in that sense, its more a case of adding meaning to the maths. I know they are historical too.
I learning about them simply because if other people use them, then how much of price movement is determined by them that they become self fullfilling ? How much and to what degree do these indicators trigger the opening of positions, if at all ?
When I sit and watch price movement, I can see it speeding up and slowing down etc so Im wondering how essential these indicators are if they are just describing something I can see anyway.
for example, I can see the maths behind the RSI now. I can see that RSI value can sit for a long time at one of the two extremes, so on that sense it really just becomes like a visual record of events that I can refer to if Ive looked away for a while. I can see its real benefit in desrcibing the discrepancy noted above to, as that would be harder to see (for me at the moment) in real time on the graph.
Its still very early days for me in this forex, but I seem to have found a reasonable strategy for entering trades which is really simple. Much more simple than using lots of indicators. It might turn out to be impractical but Ive read in a few places that the algorithms used by the big boys are relatively simple maths.
Mike
ps thanks Dale that was handy.