Would every FX currency pair or public stock that is under the 30 level using Relative Strength Index (RSI) be an undervalued pair?

Question

Would every FX currency pair or public stock that is under the 30 level in an RSI indicator be an undervalued pair at that moment (see screenshot)?

Answer 1

No, and using a 37 year old formula in finance that is as simple as:

RSI = 100 - 100/(1 + RS*)

*Where RS = Average of x days' up closes / Average of x days' down closes.

should make it obvious technical analysis is more of a game for retail traders than investment advice.

When it comes to currencies, there are a myriad of macroeconomic occurrences that do not follow a predictable timescale. Using indicators like RSI on any time frame will not magically illuminate broad human psychology and give you an edge.

It is theoretically possible for a single public stock's price to be driven by a range of technical traders who all buy at RSI 30 and sell at RSI 70, after becoming a favorite stock on social media, but it is infinitely more likely for all market participants to have completely different goals.

Answer 2

No.

The long-term valuation of currencies has to do with Purchasing Power Parity. The long-term valuation of stocks has to do with revenues, expenses, market sizes, growth rates, and interest rates.

In the short term, currency and stock prices change for many reasons, including interest rate changes, demand for goods and services, asset price changes, political fears, and momentum investing. In any given time window, a currency or stock might be:

• rising from a high value.
• falling from a high value.
• rising from a low value.
• falling from a low value.

The Relative Strength Index tries to say whether a currency or stock has recently been rising or falling; it does not inherently say anything about whether the current value is high or low.