CADJPY Example
This chart shows the price of CADJPY on the top and the 14-4 Hour Period Relative Strength Index on the bottom. As you can see, there are several points where the chart hits above or below the purple area. Anything within that zone is the “normal level” of where price could be. The part in gray represents where price is overbought or oversold. When price dipped to 30 on that first blue line, CADJPY entered into a short term uptrend. When the price rose to 70, the pair came back down.
This tool is very helpful in buy-the-dip or short-the-top opportunities, but they are not always correct. You can also see that those two overbought areas on the chart marked above 70 twice, but price continued to rise. Just as any trading tool, RSI should be used to estimate potential entries. In this instance, it would have been better to buy the dips rather than shorting when the pair moved too high according to the 14-Period RSI tool.
