 to CMC markets on Wednesday the 13th of May. And the purpose of this particular video is really a response to a question that I received at a recent non-farm payrolls webinar, which we hold usually, well, we normally hold on the first Friday of every month, but when the US Bureau for Labor Statistics releases their monthly payrolls report, we cover the numbers live. And these webinars generally invite a number of questions, one of which, and it's a question that I generally get asked quite a lot when I do presentations around the country and the subject of oscillators comes up. And it's a fairly simple question, but I also think it's a question that gives an indication of how misunderstood and dangerous if used incorrectly, oscillators can be. And it revolves around a very simple premise, or question is, the question that I get asked is, should I buy when the RSI or Stochastic gets oversold, i.e. when it drops down below 30% towards 25 and 20% or should I sell when it gets overbought goes above 70% level, 70, 75% level. And while these are very, very valid questions, the answer to both questions is unequivocally no, you should not because quite simply, just because an oscillator is overbought, doesn't necessarily mean it can't continue to go higher. Or alternatively, just because it's oversold, doesn't necessarily mean it can't go an awful lot lower. So I think when we look at the subject of oscillators and in particular RSI and slow Stochastics or any Stochastic for that matter, they're very dangerous indicators for the unwary. And for me, I generally tend to use them primarily as a confirmation or a complimentary device to the underlying price analysis. So in other words, they're secondary indicators to the primary goal of identifying price, trend and support and resistance. So in my experience as a trader and an analyst over the last 30 years, I think this is a concept that is important to understand when putting together a trading idea. The foundations I think of a good trade start with identifying the price direction, the trend and the key support and resistance levels. Using moving averages and RSI's or any other indicator should be used to supplement that primary analysis. So before we start, we also need to understand what it is an RSI and a Stochastic is measuring. So in the context of this particular analysis here, I'm going to basically go to technicals, find myself, study and put in the RSI. Now these are listed in alphabetical order underneath the studies tab. So I'm gonna find myself, standard RSI, stick it on the bottom there. If I wanna stick it in my favorites box, I just select the star button there and it then appears in my favorites tab there. So you can see straight away, the main indicators that I generally tend to use for my analysis are fairly simple. They use trend line, support and resistance line, channel lines were applicable, Fibonacci, Fibonacci extensions were applicable, standard moving averages, on here I've got two, but generally I tend to use them on daily and weekly charts. I generally tend to ignore them more broadly on anything shorter term than daily. And a MACD, an RSI and a slow stochastic. Now for the purposes of this particular video, we're going to be looking at an RSI. An RSI stands for relative strength index. And an RSI measures short-term market extremes. And it is in this context that a move above 75 or below 25 is important. What it isn't telling you, and this is important, is whether the market has reached the top or a bottom. Now, you also have to set up your task with setting a value for your RSI. Now the default value here is 10. It doesn't have to be 10. Yeah, for the purposes of this particular chart here, it's a four hour chart. So basically each interval is 10 lots of four hour charts. So it relates to the candle that's currently in front of you here. So each candle or price action relates to four hours of price action. I'm setting it as 10. You can set it for less than that. You can set it for more than that. If you set it for less than that, you'll find that the oscillator is much more sensitive to the movement of the price. Because essentially what you're doing is you're taking the last five events and measuring the relationship between the closing prices of those last five events. So that five last sets of four hours. So you've got one, two, three, four, five there. So that gives you the interrelationship between the closing prices of the last five candles. Like any average, the longer that you make it, the less sensitive it will be. So if you're looking at a moving average, for example, a one event moving average is a line chart. A 10 day moving average is obviously the average of the last 10 events. So whether it be a daily chart, a weekly chart, or a four hour chart. RSI's work on a similar basis. So depending on the value that you assign to your relative strength index of yours, RSI will determine how sensitive it is to price action. The stochastic is measured slightly differently in that context. So even though the shape is slightly different on our RSI, it only measures the changes between the various closing prices. On a slow stochastic or a stochastic, it measures it slightly differently in that it takes the closing price relative to the close of the highest value recorded over the last few events. So it's taking into account the high and the low of the last five events as well in its calculation of the slow stochastic value. That way it's trying to factor in all of the price action as opposed to just the difference between the various closing prices. As with all oscillators, the parameters are set by the user. Now generally with a slow stochastic, we can add another one here. If we so wish, and we can vary the values. Now defaults generally tend to come in the regions of 10, 6, 6, 15, 9, 9 or 15, 3, 3. Now, as you can see from the 10, 6, 6 value here, it is, how shall we say? The signals are probably an awful lot further apart in terms of you either use the crossover to trade or you actually trade on a move below the 80 level after it's gone above the 80 level and vice versa, you trade on a move back above the 20 level after it's been oversold in this case here. So there are any number of different ways that you can help yourself in terms of a trading decision in terms of either the 10, 6, 6 or the 10, 6, 3. Now I prefer to use the 10, 6, 3. It works in a similar way to the moving average, but I have to reinforce you should not use this in the context of being your loan indicator when it comes to trading. You have to also use an oscillator in the context of the underlying price action. Now this is where this cable chart comes in. And we can see from this cable chart here that there is a decent support in and around 122.45 simply because that's where we made the lows on the 21st of April. So before we rallied back up here to around about 126 on the 30th of April. Now we stopped around the 126 30 area simply because it also coincided with a previous high of two weeks before. So from this cable chart, we can establish straight away that there's a clearly defined trading range. We can also see on this oscillator here, we went overbought right here, okay? But we continue to remain overbought and this is why it's dangerous to trade an oscillator when it becomes overbought because it can continue to remain overbought as we can see here and it can continue to go higher. And we've gone, if we look all the way across here from 124 to 126.5, so we've gone 250 points all the while the oscillator has remained overbought. So only when it drops back below 80% that the cable starts to move lower. As I zoom further out, I can then see that we've come back down here. We've rebounded off 122.5. It wasn't particularly a significant support zone then but it did actually coincide with a potential move higher. And you also had a series of lows all the way through here which suggested that even on a fairly short-term basis, the pound was starting to get to the bottom end of its recent range and it did actually put in a low all the way back over here. And it also happened to coincide with a very significant Fibonacci retracement level of this entire down move from the highs that we saw all the way back in December to the lows that we saw in March. So in and around this Fibonacci level, there was a fairly good instance of significant buying interest once we got above it on the rebound of 114. Went all the way back to around 125 here. We came back here, tested it, found support. We did get a little bit of congestion around here in early April. It turned out to be fairly short-lived, went higher, came back, retested this level here. The oscillator was oversold, started to become overbought, trended high again, rematched those highs through here. So looking at that there, we can see straight away, because there's a previous high at 126.50, you are probably going to get some profit-taking going through this particular level. And that's important because what it does is it identifies an area of the market where sellers kicked in previously and generally you could well find, given that we've seen a decent rebound off this low here, for those people who've taken out long positions all the way down here, look to basically start selling back up here. We've now come back all the way down to that previous support level at around about the same time as the oscillator starts to head back into oversold territory. Now, we didn't quite get down there on this occasion. So you'd have been a very brave person if you had bought cable down here when the oscillator was looking a little bit oversold and starting to turn higher. But here we've got a much better indication. We've rebounded off that support again. The oscillator is starting to give indications that it is moving higher. And as such, based on the primary analysis of potentially trend lines or support and resistance, you are basically tilting the odds in your favor in terms of whether or not the market is going to trade higher or not. Now, it's not a silver bullet. We could conceivably rebound ever so slightly off this level and then plunge straight below that. But we already know where the key support level is in any case. So we can clearly define our downside by putting our stop loss below this support level here at 122.45. The oscillator is looking a little bit oversold. There is evidence that we could well be starting to track higher. Therefore, given the fact that we've come from 126 to 122, you've got 300 or 400 points potential on the upside. And if we do break towards the downside, then we could break quite significantly lower, but we don't need to price in a big stop loss. We can price in 50 or 60 points on the downside in the knowledge that if we do get a decent rebound, we could potentially come all the way back to 124. So this is why primarily we look at support and resistance. Primarily we look at price. Primarily we look at trend lines. We look for patterns of behavior. We use oscillators to confirm that behavior. It complements your analysis, but it should not be the only pillar on which you base your analysis. So that, in essence, is how I use oscillators. I use them to complement my analysis. I don't use them to drive my analysis. So hopefully that makes sense. And hopefully that will explain how best to use the complex subject, really, I think, in terms of how best to use oscillators and how when not to use oscillators. So that's it for today's video. Thanks very much for listening. If you have any questions, please feel free to give me a shout. Thank you very much.