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# Relative Strength - Internal

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Hi,

Relative Strength (RS) is one of the most basic concepts in Technical Analysis, like trend analysis or mean reversion. However, it is seldom talked about in discussion boards and often ignored by beginners.

Some people might be acquainted about RS in reference to CANSLIM and similar investment screening (Intermarket approach). However, RS is a generic concept which can be used for trading in all time frames and implemented with almost any technical strategy.

I’ll discuss it with basic examples here, looking forward for comments from fellow traders.

:missy:

DD

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Relative Strength (Internal)

Consider Two Stocks:

1. A stock which is trading ‘relatively stronger’ than its movement last week

2. A stock which is trading at same levels as last week (range bound)

The first one is obviously a better buy candidate than the second. I will talk about measuring RS using few indicators and PA practitioners may wonder whats the point behind maths for such simple things. Well, this thread is just about concepts and for those using (or looking to use) indicators will find this useful.

To measure this RS we can simply start with the crux behind RSI. Wilder, the founder of RSI based it upon RS of a stock which can be defined as:

RS = Average of Up days price movement / Average of Down days price movement

The raw RS moves too fast so we can smooth it using SMA(20). The Amibroker formula for RS is:

```// Code for plotting Wilder’s Relative Strength
function RS_Raw( period )
{
P = N = 0;

result = Null;

for( i = 1; i < BarCount; i++ )
{
diff = C[ i ] - C[ i - 1 ];
W = S = 0;
if( diff > 0 ) W = diff;
if( diff < 0 ) S = -diff;

P = ( ( period -1 ) * P + W ) / period;
N = ( ( period -1 ) * N + S ) / period;

if( i >= period )
result[i] = P/N;
}
return result;
}

Plot( MA(RS_Raw( 14 ), 20), "20 Day Smoothed RS", colorBlue );```

You may like to plot RS and RSI in same window and notice similar charecterstics:

1. In uptrending market, both RSI and RS move in upper half of their range. Similarly, for downtrending market they move in lower half of range.
2. Divergences and Reversals
3. Sharp movements indicate that market is overbought or oversold

Infact, many indicators measure the same under different names. The ADX suggests buying when +DI crosses over –DI. The Plus Directional Movement (+DI) equals the current high minus the prior high, provided it is positive. Similarly, Minus Directional Movement (-DI) equals the prior low minus the current low, provided it is positive. Conceptually this means that the stock is changing from downtrend to uptrend; OR, it trading ‘relatively stronger’ to past week/month. The ADX itself is used to measure the strength or weakness of a trend, not the actual direction.

I will stop writing now and wait for comments to explore other ways to measure internal RS.

:missy:

DD

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Relative Strength (Internal) Continued...

RS internal can be measured as

1. Size of Upward movements vs Downward movements

2. Momentum of Upward movements vs Downward movements

It will be worthy here to look at Aroon indicator. The Aroon indicator is unique because it focuses on time relative to price, while typical momentum oscillators focus on price relative to time. It measures how much time passed between the highest (up) or lowest (down) since the beginning of a period (in percents). A 14-day Aroon-Up measures the number of days since a 14-day high. A 14-day Aroon-Down measures the number of days since a 14-day low.

The value of Aroon declines as the elapsed time between a new high (low) increases. The difference of Up & Down Aroon lines is called the Aroon Oscillator. It's positive value indicates an upward trend (or coming trend), and the negative value indicates a downward trend.

There are three stages to an emerging trend signal. First, the Aroon lines will cross. Second, the Aroon lines will cross above/below 50. Third, one of the Aroon lines will reach 100.

:missy:

DD

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Thank you Do Or Die for these awesome explanations. I just recently learned about RSI and haven't completely learned how to use it. On my broker's website, they only have the RSI and lets you adjust the periods. It's set to 14, but I'm not really sure what would be the best way to set it. Also, how do you measure it compared to the industry? I also don't have access to the Aroon indicators. Do you know of any websites that have these indicators?

So if the RSI is in the upper half range, it is in and uptrend. Does this also work for the short term? How exactly do I use it? I know this isn't the only indicator but in terms of the RSI, when would be the best time to buy? When it's up? When it's down but heading up like some other momentum indicators?

Again thank you so much. I appreciate it when people take the time to explain things to the beginners like myself. (I wasn't sure whether I should post this in this thread or the new one so I'm sorry if you prefer it in the other one).

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I'll elaborate on RSI today evening or tomorrow with examples.

Two good free sites are:

FreeStockCharts.com - Web's Best Streaming Realtime Stock Charts - Free

Free Stock Charting Software | Technical Analysis

As per your overall approach; I'll say pick up one thing, and do not move to another unless you are acquainted with it. Going through several indicators/techniques can be confusing. Try gather as much concepts as you can, before jumping to conclusions (I will follow same approach in my threads).

For generic questions, I will be happy if you can post here: http://www.traderslaboratory.com/forums/stock-trading-laboratory/9918-getting-started-stocks.html

DD

:missy:

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Thank you so much! I will be looking forward to hearing from you again. And yes I will post generic questions in that thread from now on.

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Wow I just used the first free chart website you mentioned and it is really great. It is way better than the one my broker has. I didn't realize how much I was missing. Thanks! I'll try the second one soon too.

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Hi Umfan92,

I'm using your stock S for examples- will look forward to more examples from your side in this thread

-----------------------------------------------------------

Case Study- The RSI Indicator

The RSI has been one of the most popular indicators over a decade. A lot of chartists have talked about its peculiar ability to turn up and down in patterns which can mirror precisely the price behavior. However, like most other oscillators in its category, people start to doubt it for the trouble it gave in trending markets- going up the limits of its excursion and bouncing around there for weeks or months until the trend finally reversed. The common adage is- use oscillators for sideways markets and other indicators for trending market.

But the problem is- the market does not make announcements about its price behavior. “Hey DD, I will start trending from next week, so please find other set of indics.” And the adage turns to theoretical BS. We will take a fresh look at what RSI captures from the background of above posts on RS.

Calculation:

RSI is calculated as 100 – 100/(1+RS). This is a smart formula which takes care of:

1. Too frequent whipsaws and erratic movements are eliminated. The RSI remains remains amply responsive to price movement because an increase of the average close up is automatically coordinated with a decrease in the average close down and vice versa.
2. The question of how high is high and how low is low is answered because the RSI value must always fall between 0 and 100. This allows measuring the momentum of any number of instruments on the same scale for comparison to each other and to previous highs and lows within the same instruments. The most active instruments can be filtered by the criteria that RSI is showing the greatest vertical movement— either up or down. (RSI > 75 or RSI<25)
3. The formula is quite simple unlike Commodity Channel Index. This helps in relating easily to the basic concept of relative strength in prices.

You can relate the above diagram to charts of any liquid trading instrument.

The RS illustrates changes in momentum (note that the slope in RS curve can be much sharper than price change). The terms ‘RS Internal’ and ‘momentum’ can almost always be used interchangeably. I’m sticking to using RS Internal to relate it to the broader picture of market analysis which I will gradually share.

The direction of RS (price acceleration) can be increasing or decreasing. Decreasing RS in a downtrend may be sustainable. But in a sideways trend it will indicate exhaustion of current price move; in an uptrend, decreasing momentum will signal the trend reversal with a good probability. From this observation we can conclude the following:

1. In a healthy uptrend, the RS will not reach the lower parts of its range. RSI typically moves in the range >40 in an uptrend while touching >70 area often. In a downtrend it will remain below 60 and move toward <30 area often. If it’s moving up and down frequently to 35/65 levels, perhaps the market is not trending at all. (attached img1 & img2)
2. In an uptrend if the RSI sharply decreased to below 30, it will indicate a reversal. Similarly for a downtrend, if it suddenly rises above 70, it will indicate a reversal. These conditions are called ‘Mega Overbought’ and ‘Mega Oversold’ respectively.
3. In an uptrend if momentum decreases gradually but significantly over time, it indicates a reversal. This condition is called Divergence. After a uptrend in prices make a double top or triple top, it shows up in RSI as Failure Swing.
4. For trading in a congestion area or slow trend, RSI peaks and troughs can be used for buying/selling.
5. Since RSI directly mirrors turns in prices, we can use it for marking trendlines similarly as in prices. Pennants and Flags are important patterns, and if you can find them distinctly (occur rarely) on RSI, most likely the stock will start a fresh move in the direction of RSI breakout.

In the examples note that in img1 everything looks perfect for a trend reversal; but actually if you check the following price action the stock gets stuck in a range before resuming downtrend. This will happen all the time; no indication can assure certainty, you cannot give a prophecy about future prices. Yet you can see the RSI indicated very strongly to close any long positions before prices resumed downtrend (img3). The analysis turned out perfectly for the reversal in uptrend (img4)

Implementing the Theory:

Suppose you are trading in a sideways/congested market. If the RSI rises into the 65 area you may liquidate 50% of your position. If the RSI rises into the 75 area, you can liquidate remaining position. These RSI levels have a history of indicating exhaustion of the buying for the price run.

Your stop-loss orders can also be tightened in a similar fashion; at the RSI 65 level, they can be moved just over the 5-day moving average; at the RSI 75 level, they will be just at the lowest price of previous day.

Similarly for trending markets, you can use divergence to liquidate half of your position and tighten your stops for remaining of position. A mega overbought condition can be used to reverse your position. For tightening the stops, you can use a shorter term time frame such as 120-minutes with a moving average of higher period. (In general, trend following trades are of a longer duration than mean reversion trades).

I have used RSI with 15 periods because it falls in the most commonly used parameters. I will use the most common parameters in other examples too. You will need proper experience and/or backtesting to arrive at a system.

The parameters will also depend upon the time frame used. Short-term investors (holding periods 2-18 months) may like to note that the area for very tight stops in a bear market will not be at same ratio as in a bull market. The reason is bears march at more than thrice the speed of bulls (markets falls at >3x speed than it rises). The markets have a tendency to be more protracted while bottoming out. Knowing this allows you to tighten your stop-loss orders or to liquidate your positions at levels that are not as steep in bear markets as in bull markets. Over the years, this method will ensure that profits can be taken when the market has had an extended run or a very steep price increase.

It will be good to take up some examples from other instruments and other time frames. There is some more stuff on divergences which I will elaborate soon.

:missy:

DD

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Hi Umfan92,

I'm using your stock S for examples- will look forward to more examples from your side in this thread

Well now that you mention it, I have been trying to use the RSI on a few different companies. I've been primarily trying to find companies with low prices since I don't have too much money at the moment. I find the cheapest most actively traded companies and try to determine whether they are worth investing. I have had particular interest in SIRI, ABAT, and ALAN. I wanted to buy SIRI when it was below 2.00 and I watched as the perfect opportunity slipped away from me. I could have bought it at 1.93 and it's currently at 2.19. But I guess that happens to even the experienced traders all the time.

ABAT and ALAN are my newest interests. I have no intention of buying any shares yet. I am just going through the screening process. So far, based on what you have told me I don't think either of them will be too good. The RSI for ABAT is currently at 33.98, which is terrible. And the RSI for ALAN is at 70, which could indicate a reversal, but I don't think it will last.

I still don't quite understand everything that you have said in the last post, although I have read it several times lol. The Relative Strength on freestockcharts.com is compared to the SPY. Is that right? And do you only use the RSI in the yearly charts or is it also a good indicator in the short term such as weekly or daily? Thanks again.

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I still don't quite understand everything that you have said in the last post, although I have read it several times lol.

I tried to put everything in one place to save the trouble of putting across different posts and then quoting

Check this, if something is not clear put up as many examples as possible.

The direction of RS (price acceleration) can be increasing or decreasing. Decreasing RS in a downtrend may be sustainable. But in a sideways trend it will indicate exhaustion of current price move; in an uptrend, decreasing momentum will signal the trend reversal with a good probability. From this observation we can conclude the following:

1. In a healthy uptrend, the RS will not reach the lower parts of its range. RSI typically moves in the range >40 in an uptrend while touching >70 area often. In a downtrend it will remain below 60 and move toward <30 area often. If it’s moving up and down frequently to 35/65 levels, perhaps the market is not trending at all. (attached img1 & img2)
2. In an uptrend if the RSI sharply decreased to below 30, it will indicate a reversal. Similarly for a downtrend, if it suddenly rises above 70, it will indicate a reversal. These conditions are called ‘Mega Overbought’ and ‘Mega Oversold’ respectively.
3. In an uptrend if momentum decreases gradually but significantly over time, it indicates a reversal. This condition is called Divergence. After a uptrend in prices make a double top or triple top, it shows up in RSI as Failure Swing.
4. For trading in a congestion area or slow trend, RSI peaks and troughs can be used for buying/selling.
5. Since RSI directly mirrors turns in prices, we can use it for marking trendlines similarly as in prices. Pennants and Flags are important patterns, and if you can find them distinctly (occur rarely) on RSI, most likely the stock will start a fresh move in the direction of RSI breakout.

ABAT and ALAN are my newest interests. I have no intention of buying any shares yet. I am just going through the screening process. So far, based on what you have told me I don't think either of them will be too good. The RSI for ABAT is currently at 33.98, which is terrible. And the RSI for ALAN is at 70, which could indicate a reversal, but I don't think it will last.

The Relative Strength on freestockcharts.com is compared to the SPY. Is that right? And do you only use the RSI in the yearly charts or is it also a good indicator in the short term such as weekly or daily? Thanks again.

Yes, RS on that site is calculated against SPY by default, but can be edited for any instrument of your choice.

Forget ALAN, it is yet to stabilize from the recent price shock. See it's EOD chart (wild stock), I won't touch it unless very good fundamentals.

Yes ABAT looks very week, RSI can be used on all time frames; attaching the hourly chart.

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Well it seems I have a lot to learn lol. But I will learn it! I've been reading as much as I can about RSI and your explanation helped a lot. In terms of ABAT,you say it looks weak. How come? What stood out to you? It doesn't look too bad to me, so that must mean that I'm missing a lot! I looked at the P/E ratio, which is 1.73. I thought that was good. Is it? And the EPS is 0.57.I guess I don't really know how to properly evaluate stocks yet. I looked at the one month chart with an RSI with 14 periods. It's currently at 54 which looks to be heading up.

I hope this isn't misunderstood as me trying to free-load off of your advice so that I can go make a buck. I'm not asking for stock picks or anything like that. I am not looking for an easy way. I'm just trying to learn how everything works. I hope you don't mind the questions. Once again thank you for all your help.

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In terms of ABAT,you say it looks weak. How come? What stood out to you? It doesn't look too bad to me, so that must mean that I'm missing a lot! I looked at the one month chart with an RSI with 14 periods. It's currently at 54 which looks to be heading up.

Now this makes me feel worried. The stock is in a obvious downtrend. It has been sliding down smoothly. What signs of strength do you see?

You should not be looking only recent price/indicator value. After a downtrend we can buy only on mega overbought. Divergence can indicate a reversal, but they need to be watched closely- I will soon elaborate on that soon.

I hope this isn't misunderstood as me trying to free-load off of your advice so that I can go make a buck. I'm not asking for stock picks or anything like that. I am not looking for an easy way. I'm just trying to learn how everything works. I hope you don't mind the questions. Once again thank you for all your help.

Hey, asking questions is the best way to appreciate the time I put down to write so much!

--------------------------------------------------------------------------------

Last week the market has been strongly up- its late to find buying opportunities based on bottoming out through RSI divergence.

See the attached AOL chart. RSI is strongly improving; RS(DOW) has been alarmingly coming down, but started improving recently. Lets keep it in watchlist.

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Now this makes me feel worried. The stock is in a obvious downtrend. It has been sliding down smoothly. What signs of strength do you see?

You should not be looking only recent price/indicator value. After a downtrend we can buy only on mega overbought. Divergence can indicate a reversal, but they need to be watched closely- I will soon elaborate on that soon.

Lol Don't feel worried! I'm not going to spend all my money buying as much ABAT as I can! I will learn to read the charts correctly soon. I saw what you meant about the downtrend. I just thought they could be in a short term uptrend. But I guess that is just because the whole market is going up. Is that more or less what's happening? Also I noticed the Volume increased so I guess the sudden increase was about increased demand? I'm trying to understand what's going on and I think I'm getting it (of course thanks to you!).

So I guess what you're saying is that the longer term chart is more important? Is the RSI less reliable in the short term?

Hey, asking questions is the best way to appreciate the time I put down to write so much!

I'm glad you feel that way! I didn't want to give off the wrong impression.

Last week the market has been strongly up- its late to find buying opportunities based on bottoming out through RSI divergence.

See the attached AOL chart. RSI is strongly improving; RS(DOW) has been alarmingly coming down, but started improving recently. Lets keep it in watchlist.

Yeah I was about to buy SIRI at about 1.98 and then it dropped to 1.93, but I decided not to make another rookie mistake like I did on S. So then I watched SIRI climb and climb and I would have made a nice small profit. But I guess that's better than buying SIRI and watching it go down.

Thank you for including the chart of AOL. I see how the RS and the RSI is improving. I noticed that even though the low of the price was the same, the low of the RSI was improving. I will look out for these trends. Thank you! And I look forwarding to hearing more about it from you.

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have you tried RSI with 2 periods?

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Lol Don't feel worried! I'm not going to spend all my money buying as much ABAT as I can! I will learn to read the charts correctly soon. I saw what you meant about the downtrend. I just thought they could be in a short term uptrend. But I guess that is just because the whole market is going up. Is that more or less what's happening? Also I noticed the Volume increased so I guess the sudden increase was about increased demand? I'm trying to understand what's going on and I think I'm getting it (of course thanks to you!).

So I guess what you're saying is that the longer term chart is more important? Is the RSI less reliable in the short term?

How short is the trend you're referring? it is very clearly weak on 60-miunte chart that I attached.

RSI may be used for 2 minute charts also; but then, intraday trading is a totally different ball game.

I wouldn't have noticed SIRI either- nothing particular.

BTW do not use freestockcharts- it gives wrong value for RSI.

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have you tried RSI with 2 periods?

not really... will be great if you can elaborate on its use

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I wouldn't have noticed SIRI either- nothing particular.

BTW do not use freestockcharts- it gives wrong value for RSI.

I thought SIRI would be good for a short term trade. What website should I used for the RSI? Are there any other better chart websites like freestockcharts?

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-----------------------------------------------------------------

Like my previous post, I will try to make this exhaustive for absolute beginners. Others may like to skim the content as appropriate.

Divergences

Bullish Divergence occurs when a stock declines in RS while its prices keep increasing. Similarly, bearish divergence occurs when the stock prices keeps falling but it RS shows improvement. Obviously, this is an indication of weakness in prevailing trend. Experienced traders make decisions by factoring the change in RS in some form or other; and divergences can be a very good starting point for beginners to spot change in RS.

Divergences are marked by matching peaks and troughs in prices and oscillators. In an uptrend, connect consecutive lows; you will note them as prices make a new low vs. the RSI begins to move higher. In a downtrend, connect consecutive highs; prices will make a new high while the RSI starts falling.

Divergences tend to occur ALL the time and like any other chart pattern, there are several factors which strengthen or weaken them. Let’s look at them.

If the divergence occurs at a slow hollowing price formation, it is the weakest

Between two distinct peaks (troughs), it is better

If the divergence occurs after a distinct up move or down move, with the definition of price making higher highs and oscillator making lower highs

Divergence can also occur consecutively, another sign of indication

With volume confirmation, still better

With a confluence of candlestick patterns, still better. Note how the reversals are obvious and decisive... with several confluences like price and volume patterns.

There are more relative terms coined by authors- Reverse Divergence or Hidden Divergence. These do not usually occur in stocks. These are typically opposite of those marked above, and indicate a peaking of RS rather than its weakening.

Reverse divergences may occur when prices are range bound. Reverse bullish divergence the oscillator continues to make a lower low (after a downtrend), while the prices remain range bound. The oscillator is not constrained by a horizontal trendline and makes its peak toward the end of the trading range. Wait for the prices to make a breakout, at this time RSI will strongly support the new move. It is hard to spot them in/at the end of downtrend. If you do, the prices bottom out but the oscillator may mark a lower trough.

:missy:

DD

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Some more examples to help you note subtleties.

Good- prices making a double top, RS continually decreasing

Good- Distinct peaks in prices after an extended upmove

O.K.- the first set of consecutive peaks make a good divergence only. The next set mark a weak one.

Good- inherent RS weakness

Good- continual weakening RS

OK- do not occur after a extended run, peaks are not distinct but rather caused by a gap

Great! continual weakening in RS, volume shows exhaustion

:missy:

DD

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Adding AAPL to watchlist/portfolio. The stock was constrained for some time, as you can see the trading range and RSI unable was to move above 60 level.

This breakout is strong and recent RSI swing suggests start of a fresh upmove. See the Mega Over bought stage mentioned earlier for comparison.

Edited by Do Or Die

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I'm elaborating on Mega Overbought condition, as asked through PM.

Criteria essential to this stage:

- The instrument must be in obvious downtrend.

- RSI must clearly reflect the downtrend by moving in the <60 area

- All of a sudden, RSI sharply rises to >70 area, with a relatively little change in price

The possible outcome is start of a fresh uptrend. You can see in the attached chart of Philadelphia KBW Bank Index, everything matches ideally.

In the APPL chart in previous post, it matches loosely. Examples are the best ways to learn, so if anyone has questions I'll suggest to post charts.

BTW about divergences, this one was Good based on factors I mentioned previously.

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Current Watchlist: AOL, AAPL, WDR, INFY, SUN, UPS, ITW, KO, COP, CVX (9 stocks). All of these have been picked from strength shown by internal RS. Among these, AOL is a buy for on breakout only. For others, the market will probably cool off in this/next week, which may trigger buy entries.

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Update on the Watchlist

AAPL: Flying high... first target will be 420

WDR: Buying opportunity with stoploss around 34

INFY: Wild gap down, no buying until that gap is filled

SUN: Buying opportunity with stoploss around 38

UPS: weak buying opportunity, stock is currently in a congestion area

ITW: Buying opportunity on EOD with stoploss 53.70; better buy on 60 inute charts

KO: Buying opportunity with 66.5 as stoploss

COP: Buying opportunity with stoploss 71.40

CVX: Buying opportunity, with target 120

AOL: still stuck in the trading range

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The recent crash was unexpected in the speed of fall- going down more than 10% in 10 days straight. I didn't see this moment of truth coming so fast and furious.

Two stocks still hold strong AAPL and KO.

To answer a PM

So I was looking at many charts, and I looked at the one year chart or SIRI. I noticed that the RSI seems to be in a constant downtrend (by connecting peaks), while the price has been in a constant uptrend (until the last month or two). So would this be considered a huge bearish divergence?

If so, would that mean that the stock could be heading for a strong downtrend?

Refere here and here.The RSI has been reflecting a strong uptrend since since past 12 months by staying above the 40 level and penetrating 70 level on the upside.

Always mark a bearish divergence with peaks and a bullish divergence with troughs.

A bearish divergence occurred in the uptrend in May-Jun.

Most recently the uptrend has been put in question reflected by the RSI dropping to 30 area coming down from 70. This indicates a sideways market. You can trade currently using a overbot/oversold strategy.

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Thanks for the reply. I see what you mean. I was looking at it on freestockcharts.com and it still gives incorrect values for the RSI. I thought they had corrected it. I looked on stockcharts.com and it was exactly like you posted there. I guess it all matters where you get your information.

I do have one other question though. How is is that you connected the highs on the divergences, but you connected all the other lows on the previous up trend? I know that you connect lows for up trend and highs for down trend, but if you connect the peaks of the up trend just like the divergence, then the price constantly rises while the RSI falls.

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