We can see how the index briefly tipped above 70 suggesting that the currency pair was overbought. This proved to be the case as the EURUSD subsequently declined. The RSI then fell below 30 indicating an oversold market, and it wasn’t long before the euro bounced sharply before settling in to a relatively narrow trading range. It is worth noting that the RSI remained below the oversold 30 area for quite some time and the EURUSD continued to decline over this period. In contrast, the RSI only briefly broke above 70 before the market sold off. So there’s no hard and fast rule over how quickly one should react to breaks above 70 or below 30. Consequently, many traders also employ additional indicators or drawing tools to help them identify actionable trading signals.
In common with other oscillators (such as the MACD), a divergence between the trend in the RSI and in price can also highlight trading opportunities. Here’s an example where the price of the EURUSD is pushing higher, making a succession of higher highs and higher lows.