Relative Strength Index (RSI) Indicator
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After determining the beginning and direction of a new trend, it is necessary to determine as accurately as possible the point of its end and the beginning of the reversal, where opposite deals are opened and initial values are determined for further assessing the dynamics of the new movement. One of the most accurate technical tools how to make money on binary options on reversals for any trading asset is the Relative Strength Index (RSI).
Determining the trend dynamics
According to the indicator developer J. Welles Wilder, when calculating the price movement speed, two main problems need to be solved:
- Chaotic market. This term means that even long-standing speculative and fundamental price movements can cause a reversal of the Relative Strength Index, even if the market is outwardly calm. It is assumed that additional smoothing of the final value maximally removes “noise” on binary options trading signals.
- Evaluation criteria. It is necessary to clearly define the factors by which the indicator will record the transition of market phases. Experience has shown that it is best to evaluate using a digital scale, on which the key levels are plotted.
To improve the quality of the analysis, Wilder proposed to determine the positive and negative price changes in comparison with previous periods. Further, the RSI indicator is adjusted to the range of 0-100 for the convenience of visual analysis.
Indicator Algorithm
In other words, the percentage ratio between the number of "long" (bullish) to buy and "short" (bearish) price bars for the specified number of periods is determined. Thus, the overbought and oversold periods are determined by the RSI indicator.
The type of the average is not decisive, for example, in the original version; the Smoothed Moving Average (SMMA) is used. At the time of the appearance of the indicator (1978), it was well suited for the stock market, but the current Forex is several orders of magnitude more volatile, so simple (SMA) and exponential (EMA) averages are recommended. Also, to find options trading signals, you can use the RSI, built on the data of other indicators!
Important note: in the final formula, the denominator value may turn out to be zero, which often happens when during all the calculation periods it goes up and, accordingly, D=0. In such situations, the indicator value is taken as 100.
Settings and appearance
From the point of view technical analysis, the RSI indicator belongs to the group of oscillators: shown a separate window under the price chart as a dynamic curve, usually in the range of 0-100. The type of price and number of periods (bars, candles) are configured.
The classic version of the RSI overbought/oversold areas: on a strong trend, set 80/20 levels, on a sideways (flat) movement at 70/30. An auto binary trader can give stable results at the 70/20 and 60/20 levels, but you need to make sure of this on different timeframes and tested periods!
Additionally, use the middle level 50:
- As a support/resistance level that finally confirms the indicator's exit signal from the extreme areas. Beginners should only open positions after breaking through the level!
- If the oscillator starts moving between 50 and the oversold/overbought zone after the breakout of the level, this indicates a slowdown in the trend. The chart shows a correction or the beginning of consolidation, which makes it possible to use the RSI indicator as a channel indicator and enter the market on rebounds from the borders. This technique on binary options signal free is very risky and requires experience!
The number of periods: the basic version uses 14 and 9. Accordingly, on the daily (D1) timeframe, the data of the past 14 and 9 days are analyzed, on the hourly (H1) there will be 9/14 hours, etc. As practice shows in the current Forex market, a 25-period RSI is recommended for medium and long-term trends, but we always look at the volatility and features of the asset.
The indicators work similarly to the computers multiple monitor strategy "Elder's Three Screens", in which several timeframes are analyzed simultaneously - as you can see; key zones on all RSI appear at about the same time, which confirms the signal.
How the strategy works only on RSI watch video. You can choose any broker, today we are trading on Olymp Trade:
In any oscillator, reducing the number of periods allows binary signals software to more actively respond to price fluctuations and market “noise”. To maintain the reliability of forecasts, we do not recommend less than the following values:
- For daily and weekly-3 periods;
- Intraday trades – 9/14;
- Timeframes H1-M30 at least 5/7.
The author recommends using the "5% rule" according to the data of the last 10-15 days, we determine the range within which the RSI moves at least 5% of the trading day - we are looking for entry points on breakouts/bounces from its borders. The main drawback is the need to regularly manually adjust the channel width; however, for this, you can use the appropriate scripts and advisors.
Basic binary trading signals
Options are opened according to standard oscillatory signals: breaking through levels and input/output to the extreme areas:
- Overbought/oversold zones. Basic winning binary signals by RSI: consider only PUT-option when the indicator goes down from the upper overbought zone (80/70/60 level), and only CALL-option when moving up from the lower oversold zone (20/30/40 levels):
- Always wait for the breakout candle to close on the chart and only then open a trade;
- When the opposite RSI signal appears, close the position regardless of the current profit/loss levels.
Important: consider breakouts only in direction of the trend. Moreover, it is the "main trend" and local corrections and rollbacks.
Please note that the exit from the RSI zones does not mean an immediate opening. This is especially true when before this there was a long period of overbought/oversold conditions leading to the "stagnation" of the oscillators and breaking the logic work strategy for binary option.
Moneymakers will add volume to give the market momentum. Such speculative actions lead to a sharp reversal of the indicator, which also quickly end.
- Breaking through the central line 50. Trading is simple: breaking from bottom to top adds volume or open new CALL-options, top-up for PUT-option. We trade only trend periods; on a wide flat, it is better to replace RSI with Stochastic with basic settings.
Important note: On most currency pairs and cryptocurrency, the price tends to consolidate around the middle or zero levels of the oscillators, which is why they are called "basic". But on strong trends, the ranges are narrow and short-lived. In this case, it is better to increase the expiration to skip quick corrections and pullbacks.
- RSI divergence. As always, any discrepancies in the movement of the price chart and oscillators are the strongest signals of a close correction, pullback or full reversal.
If a discrepancy is detected, look at how many periods have passed between the last max/min divergences. If it is less than 7, you need to wait with the option, there is no reversal after 50, then this is most likely a speculative (albeit long-term) movement and it is recommended to stay out of the market, controlling the RSI chart and auto binary signals.
Use with other technical tools
Regardless of the type and strength of the signal, we always look at the price chart. Any oscillator only confirms candlestick and chart patterns and is better used in conjunction with other technical tools. The most commonly used combinations are:
- Trend lines. Receive leading live trading signals that work as in the price chart:
- Several unsuccessful retests and touches of the line increase the reliability of the signal, especially if this occurs in the extreme zones;
- The longer timeframe and trend, the stronger a signal.
Moving averages and RSI. According to its data, the Moving Average is calculated, so its movement differs from the MA with such periods on the price chart. According to the live Forex trading room this can be used to identify hidden divergences.
Moving Average in options trading signals should be considered a dynamic resistance level confirming a change in the main trend. The indicator is higher; open or adds new CALL options, below – PUT-option. MA crossover signals an imminent reversal, although the RSI may be outside extreme zones.
Sample strategy «RSI+Moving Average»:
Important: Incorrect selection of Moving Average periods can further increase the lag since the RSI already has smoothing. It is not recommended to increase periods more than 1.5-2 times more than the oscillator.
- RSI and channel indicator. If set the Bollinger Bands instead of the Moving Average in binary options strategy, get better dynamic supports/resistances; this makes it possible to enter almost at beginning of a reversal, making the analysis of the situation easier.
In addition to Bollinger Bands, other channel instruments such as TMI, Keltner channel or MA Envelopes can be used similarly.
Sample strategy «RSI + BB»:
Recommendations about use …
- If the binary options platform does not provide for drawing additional indicators on the RSI, you can use other trading terminals, for example MetaTrader. Broker for opening options only.
- Speculative market and publication of strong fundamental events increase the number of false signals in binary option live trade. Before this, there is usually a side trend (flat) with a sharp exit from it. If the description of an automatic advisor contains the Relative Strength Index, disable it - is difficult to determine the truth of a breakout or reversal!
- Always check the trading binary signal on higher timeframes. So if M1-M5 is oversold, but M15-M30 shows overbought, then not only intraday but also short-term transactions are almost always unprofitable. Look at additional confirmations, can reduce the volume of the next options, always close at the first signs of a reversal!
- When the chart enters extreme zones, the following often occurs: the upper or lower level is broken, but the oscillator does not go further, a reversal begins. The author calls this pattern "unsuccessful swing" and believes that it is possible to enter the market. In general, the statistics are positive, but the signal is of average strength, we are sure to look for confirmation of trend continuation.
- There are opposite opinions on the use of oscillators in scalping. Some traders, based on results of testing top binary options signals, believe that this is quite possible, while others consider it incorrect to use the terms "overbought/oversold" for a period consisting of noise and short price indicators.
- In this situation, the main thing is to decide what is considered "scalping". You can make money even on an M1 timeframe, although there are many false signals. If we switch to M5-M15, which can also be attributed to scalping timeframes, RSI starts to work quite reliably, especially during periods of wide flat.
Always test the scalping strategy before installing it on a real account, on the crypto market it best to trade manually, M5-M15 allow you to do this with an acceptable delay. In addition, the first signals about a possible reversal and potential entry points for intraday positions appear on the RSI.
- In addition to trends, other classic technical patterns are formed on the RSI chart: "Head-Shoulders", "Triangle", "Flag", "Wedge", etc. It is possible to determine the future movement of the indicator with a high probability, and therefore the dynamics and trend of the market as a whole.
Indicator patterns often form earlier than on the price chart. This allows, in addition to the direction and dynamics, to estimate the time of the beginning of market changes. All graphical signals of oscillators are strong enough, even if the pattern has not fully worked out, you can make a good profit.
Summarize… A binary trading strategy must necessarily contain a tool for determining the maximum buy/sell and the Relative Strength Index is one of the best. It confirms well any trend indicators, especially moving averages with their maximum lag.