For the purposes of this article I will be using the Relative Strength Indicator or RSI, to show the overdone condition. RSI is an indicator that shows a currency pair is over done when it reaches 70 or 30. This means that when the indicator reaches 70 the pair is considered overbought. If the pair reaches 30 then it is considered oversold.
There have been more than a few newcomers to Forex that simply tried buying at these extremes. Perhaps after a string of successes they found the problem. Let’s consider the last 10 years of the USDCHF daily chart. Using the following script:
IF RSI(Close, 14) > 70 then
IF RSI(Close, 14)
Category All Trades Winners Losers
Total Number of Trades 15.0 10.0 5.0
Average Trade Net Profit(pips) -29.40 510.90 -1110.00
Average Time in Trades(bars) 154.07 96.10 270.00
Average Run-up(pips) 505.3 546.90 422.20
Average Drawdown(pips) 1061.55 565.20 2054.20
Entry Efficiency 78.48% 79.01% 77.41%
Exit Efficiency 78.43% 81.49% 72.31%
Trade Efficiency 14.89% 27.92% -11.18%
However, knowing this information gives a great starting point for improving the system. This happens to be where most people get off the analysis bus and move on. However there is a simple way to get past this poor result and make a profit. It just take a bit more work and determination to get there.