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.
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.