Example of Ranging Market Cont.

Combining RSI with MACD and Moving Averages in Ranging Markets

Now we add the MACD indicator to our analysis, which incorporates moving average crossovers. To find out more about the MACD indicator, or how to interpret it, visit the MACD article.

1. The sell signal here is not straightforward.
   1. RSI flirts with the 70 overbought level for half the month.
   2. An experienced trader might be able to realize that the overbought condition will not continue, and will proceed to set up an entry sell order to catch the drop in price, when (and if) the trend reverses.
   3. What was the trigger that made the Yen leap in this case? In our archives, it says that a very positive Tankan survey (a Japanese business confidence measure) came out that day and it was the sort of news that the market needed to sell Euros from its overbought condition

2. There is a buy signal as RSI comes close to 30 and reverses.
   1. The MACD-Line bottoms out as well.
   2. A trader that notices the revesal would enter a buy order somewhere in the blue candle that is shown in the rectangle.
   3. There is danger ahead, if one is using MACD signals, in the form of a whipsaw.
   4. According to our strategy in a ranging market we are now waiting for a sell signal that comes when RSI reaches close to 70. However, the sell MACD crossover occurs in bearish territory, and we are expecting RSI to keep rising due to buying pressure.
   5. An experienced technical trader may be able to avoid the MACD whipsaw and wait for (C).

3. RSI has made it to the 70 level, signaling an overbought condition. This is part of the Sell setup we were looking for.
   
   1. MACD-Line levels off after reaching its most recent high. Looking at historical high levels is an interpretation of the MACD discussed here.
   2. Since we are trading on RSI, its Sell signal is confirmed when a MACD Sell crossover happens shortly in the future.

4. Here, we have reached the opposite extreme level, showing an oversold condition.

1. This is our RSI buy signal during ranging conditions. When RSI turn back up, showing strength by the pair's bulls, it is an indication of a reversal.
2. We also see the MACD line peak and turn up.
3. The RSI buy signal is confirmed a little later on when a MACD crossover appears.
4. Be careful ahead of a second MACD whipsaw.

5. RSI comes close to overbought levels. When RSI reaches 70 for the first time there is one peak and retraction. However, Euro bulls were not done and showed a second burst of strenfth.
   
   1. As the pair reaches above 70 for a second time, it is a technical indication of a sell setup. A fundamental news event that favored the Japanese currency over the European one could set off a reversal.
   2. This time the trigger for the Yen’s gains is a call by the G7 over the weekend to see the Asian currencies appreciate.

ShareThis

The materials presented on this website are solely for informational purposes and are not intended as investment or trading advice. Please refer to our risk disclosure page for more information.