Understanding Max Iwamoto's "RSI" Part 2 [Max Iwamoto]

Max Iwamoto Profile

Iwamoto Keisuke. As the nickname “No Educational Background Technical Analyst” suggests, he is a rare no-education analyst in the industry. Even in an era where educational background heavily matters, he is daily challenging the FX market, which is completely unrelated to such concerns. With the feeling of “now that everyone can easily start FX, I want you to acquire the skills to keep winning,” he serves as a serial author and seminar lecturer.

※This article is a reprint/edit of an article from FX攻略.com 2018 September issue. The market information in the main text may differ from the current market, so please be aware.

Understand from the Formula to Grasp the Essence

This time, continuing from the last time, we discuss RSI (Relative Strength Index), a representative oscillator indicator. In the last piece, we explained the origin and overview of RSI, but this time we will explain the cautions when actually using it. You may wonder why we use the term “cautions” rather than “utilization methods,” but I think you will understand after finishing this article. Even if you are not a contrarian trader, please read it.

First, as mentioned last time, RSI focuses on the “range” within a certain period of price movement and indicates its position. The calculation is as previously described: of the fluctuation range (upward and downward) in a fixed period, what proportion of the upward movement accounts for, and whether that ratio exceeds 70% or falls below 30%—this edge band is the common focus.

To sense overbought and oversold levels in market trends, the usual flow is to sell when the level exceeds 70% and then falls back below, and to buy when it drops below 30% and then breaks through upward.

In the previous discussion, it has been verified that market movements have mean reversion; indeed, there are levels such as overbought and oversold, and there is a consensus that prices revert to the mean and bounce between these levels. Therefore, focusing only on the 70% and 30% levels and trading accordingly is certainly correct in one sense, but if you only pay attention to those levels, you will lack understanding.

As is always the case, when using technical indicators, it is important not to simply follow what is “said to be true” but to pause and thoroughly understand the indicator’s calculation from the formula, shed biased viewpoints, and broaden your scope of use.