There’s a lot of chatter about how the EURUSD is oversold using RSI’s, Bollinger Bands, etc. These are tools that help tell oversold or overbought conditions. For me, they are only useful in that they make me aware of the “potential” situation. They do not define risk. Oversold can become more oversold and more oversold and more oversold. We have seen that in the EURUSD, as despite being oversold today, the price of the pair continued to go lower. This situation increases fear, anxiety and fear is a traders worst enemy. I try teach traders to “steer clear of fear”.
As a secondary trading tool, an oscillator can be helpful, but only if the bias from tools that I use to define and limit risk, show a reversal of the trend (in this case to the downside). So the question is where does a correction higher turn the bias from being bearish to bullish for me?
EURUSD needs to get back above the 1.2919-21 area to prove they can take back control.
Looking at the 5 minute chart above, if you were to put a Fibonacci retracement down from the New York session high to the New York session low today, the 38.2 to 50% retracement level comes in at 1.29099 to 1.29189. What was the lows from last Thursday and Friday ? 1.29196 and 1.29211. So, if the price of the EURUSD can move above the 1.2920-21 area – and stay above that level – that might be a signal that the buyers are taking back control from the sellers at this low “oversold” level.
If the price cannot get back above the 1.2920-21 level, the sellers remain in control and the price can continue to trend to the downside – even though it remains oversold.
If the price goes higher and 100 people told me “See the oscillator showed the way” I would say, “But at what potential cost?” That cost could be a move to the 1.27865 level first or any level (61.8% retracement target) because trends are fast, directional and have larger trading ranges than most expect. Oscillators can go to 1 and no one knows for certain how low is low.
However, if someone said to me “The oscillator worked”, I can say I used the oscillator to make me aware of a potential bottom, but I got out of my short/went long at the 1.2923 level because the price went above the 50% and the lows from Thursday and Friday. In other words, I prefer to wait for a move above a risk defining level at the 1.2920-21 using a tool that defines and limits risk.
In short, I would rather stay on the trend and continue to bet with the sellers, and risk profit to 1.2920-21, then trying to pick a bottom without risk being defined….Being oversold is just not good enough – especially in a trending market.