Identifying Overbought and Oversold markets is easy when using the RSI Indicator in one single chart window (also known as the THD Meter). Below is the snapshot of the currency futures with the RSI indicator inserted for the Currency Futures on a 45 minute timeframe.
Identifying Overbought and Oversold Markets
As you can see from the chart above, both the Swiss Franc and British Pound currency futures are above 50, indicating an overbought status in both of these markets. The TradersHelpDesk ADX indicator also showed a value greater than 70, also indicating tat both markets were overbought. In essence you have two non-correlated indicators showing an overbought status. What can you expect? A price retracement (aka pullback). Where will the price retracement most likely go? To the Average True Range stop that is incorporated into the Trend ATR indicator.
By using very specific criteria, we are able to put opinions to the side and trade actual technical analysis, ie RSI indicator is greater than 50 then the market is overbought or if the RSI indicator is below -50 than the market is oversold. Or if the ADX is greater than 70, the market is either overbought or oversold we simply need to look at the color of the ADX line to know if it is overbought or oversold. Unlike the RSI indicator, which is a directional indicator, the ADX indicator is a non-directional indicator which is why we must look at the color of the line to distinguish if it is overbought (blue) or oversold (red).
Since the market is overbought, where would price go? This is where we bring in the Trend Average True Range Stop Loss indicator. Price will typically go back to the Average True Range Stop (plus sign on the charts).
Using these three indicators we have identified when the markets are either overbought or oversold and where price is likely to go next.