Great info, thanks. These explanations are great for the newer traders like myself.Hi CPartners,
The most commonly used are RSI or Stochastics but they are not always a good indication of those levels.
They will both tend to top crawl (for overbought) or bottom crawl (for oversold)
Anything 80 and above is considered overbought and 20 or below oversold. In saying that you need a pretty good signal to back those indicators up.
A better way to use them (especially RSI) is to get in on continuation of trends.
On higher timeframes such as the Daily chart, anything aove 50 is considered an uptrend and below 50 a downtrend. You will need to asses what the established trend is to confirm this (sideways motion or channelling means nothing)
Often you will see RSI bouncing off the 50 level on the daily chart as it retraces then continues on in the direction of the trend.
Once you know the trend you can use RSI on the lower timeframes such as 4Hr, 1Hr and right down to 15Min to pinpoint an entry.
Wait until levels overbought (for a downtrend) or oversold (for an uptrend), look for a signal on pivot levels, support and resistance levels, trendline bounces, MACD Convergence/Divergence or MACD looking to bounce off the 0 line then jump in the trade in the direction of the trend.
One thing I might add is that once I got rid of all my indicators except 2, my trading success increased greatly.
The problem with too many indicators is that more often than no they will show you conflicting signals - one will show a short and one will show a long trade on the currency.
This will only confuse you more as you wont know which way to go.
I still keep an eye on RSI occasionally but it's not permenantly a part of my chart setup.
Hope this helps - Happy Trading!