An options trading strategy on TMA and RSI

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RSI Binary Options Strategy – How It Works

What is RSI Binary Options Strategy?

How to use RSI Options Strategy?

RSI is represented as a traditional oscillator with a separate window under the price chart. Its ranges from 0 to 100 and the level of 50 usually divides the indicator’s value into two parts. Additional lines come at the level of 70 (overbought) and 30 (oversold), showing strong price movements. The screenshot below shows how the RSi indicator binary options looks like.

RSI settings for Day Trading

Thanks to a simple and reliable mathematical formula, which calculates relation of recent price gain to the latest loss in a given period, binary options traders can adjust the key parameter for the RSI oscillator – the period of calculation. The default period is 14 bars or candlesticks. For example, if the analysis is made on a daily timeframe, then RSI calculates the value in last 14 days. For the hourly chart, RSI with the same period will take into account 14 hours.
Some technical analysts use Fibonacci numbers for the period from 13 bars for fast aggressive trading approach on short-term charts and 21 bars for conservative trading method on longer timeframes like binary options daily strategy. Choosing the most efficient period depends on individual trading strategy, the timeframe and expirations time of binary options.
Another important parameter to modify is the value of oversold/overbought levels. The default and the most widely-used relation is 30/70, while some of the binary options traders prefer a combination of 20/80 to smooth the unnecessary market noise and avoid too many false signals.

Trading signals

The flexible nature of the indicator and multi-purpose application allowed binary options traders to notice several patterns on the RSI indicator window, and develop different trading signals pointing to a high likelihood of current trend’s reversal. There are four main patterns for different applications and scenarios.

Reversal signal

When an asset is trading in a sideways consolidation range without clear direction, binary options traders take advantage of RSI indicators ability to show overbought and oversold levels. Once the oscillator touched the level of 30 or 70, a trading signal occurs and the trend changes the direction. Therefore, traders should consider buying CALL options on a test of the oversold level and PUT options when RSI indicator reached the overbought zone.

Here is an example of RSI indicator range:

Overbought and Oversold Levels

During a strong trend, overbought and oversold levels can be shifted. This technique is used to measure the depth of possible retracements and corrections. For instance, when RSI bounces off the oversold zone and inches up to the level of 50, that threshold is considered as the overbought level, and new put options can be bought from there. For an uptrend, the condition is the same but mirrored. This pattern is also called a bounce by trend. An example below shows how the threshold of 50 acted as the overbought level.

Bearish or Bullish divergence

This signal occurs when the price action does not come in accordance with the RSI performance. For instance, the chart shows higher highs of the rate, while RSI oscillator draws lower highs. That contradiction is called a bearish divergence as it signals a potential reversal of the trend. Bullish divergence happens when the price of an asset charts lower lows but RSI prints higher lows. Bearish and bullish divergences are usually strong and reliable reversal signals.

Swing rejection pattern Example

This is also a reversal signal, and it has four stages of the action.

Best RSI settings for Swing Trading:

  1. RSI drops to oversold zone as the sequence of strong downtrend;
  2. RSI edges back above 30;
  3. RSI falls again without entering the oversold zone;
  4. RSI breaches the recent peak value.

Best Indicators Combination in RSI Binary Options

Stochastic RSI

This is a combination of two oscillators in one window. Besides the RSI, here is used also usual Stochastic oscillator. The Stochastic RSI indicator has similar patterns as described above with the addition of another line. A crossover of two lines is considered as a confirmation trading signal as well. Both indicators parameters default on the chart below, however, traders can try to modify settings in order to get one of the oscillators slower than the other. That would reduce the frequency of trading signals but increase efficiency.

If you like this strategy, you might also be interested in this Triple Top and Triple Bottom

MACD vs RSI

One of the most popular combinations in technical analysis MACD and RSI. The main advantage of such an advanced RSI strategy is that it combines a slow trend indicator MACD with lagging performance and fast RSI leading oscillator. In this case, bearish or bullish divergence on the MACD indicator has to be confirmed or denied by fast RSI. Once a confirmation signal occurred, it’s time to enter the market, buying call or put options depending on the trend direction.

An example is shown in the chart below:

If you like this strategy, you might also be interested in this Reversal Trading

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This article explores how to trade with the Relative Strength Index (RSI), highlighting why traders use this indicator, what the indicator is and what it is for, as well as looking at topics such as RSI trendlines and RSI Two Period Divergence.

Technical analysis is a method of predicting price movements and future market trends, by studying charts of past market action, and comparing them with current ones. Technical analysis is concerned with what has actually happened in the market, and what might happen. It takes into account the price of instruments, and creates charts from that data to use as the primary tool.

One major advantage of technical analysis is that experienced analysts are able to follow many markets and market instruments simultaneously. There are three main principles in technical analysis that should be covered before taking a precise look at the RSI indicator:

Trend is your friend

Technical analysis is used to identify patterns of market behavior that have long been recognised as significant. For many given patterns, there is a high probability that they may produce the expected results. Additionally, there are also recognised patterns that repeat themselves on a consistent basis.

History repeats itself

Forex chart patterns have been recognised and categorised for over 100 years, and the manner in which many patterns are repeated leads to the conclusion that human psychology has changed little over time.

Price Action discounts everything

This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. However, pure technical analysts are only concerned with price movements, and not with the reasons for any changes that may occur. One of the indicators that technical analysis is very reliant on is RSI – the Relative Strength Index Indicator. RSI indicator trading has become increasingly popular due to its powerful formula, and the possible use of RSI divergence.

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What to Know About the RSI Before You Start Using the Indicator – The RSI Indicator Fundamentals

What is the RSI indicator?

The RSI measures the ratio of up-moves to down-moves, and normalises the calculation so that the index is expressed in a range of 0-100. It was originally developed by J.Welles Wilder. If the RSI is 70 or greater, the instrument is assumed to be overbought (a situation whereby prices have risen more than market expectations). An RSI of 30 or less is taken as a signal that the instrument may be oversold (a situation in which prices have fallen more than the market expectations).

Contrary to popular opinion, the RSI is a leading indicator. The formula for the RSI indicator takes two equations that are involved in solving the formula. The first component equation obtains the initial Relative Strength (RS) value, which is the ratio of the average ‘Up” closes to the average of ‘Down’ closes over ‘N’ periods represented in the following formula:

  • RS = Average of ‘N’ day ‘s closes up / Average of ‘N’ day’s closes down

The actual RSI value is calculated by indexing the indicator to 100, through the use of the following formula:

If you are using MetaTrader (MT4), you can attach the indicator on your MT4 chart, and simply drag and drop it to the main chart window. The GIF provided below demonstrates this process:

Source: MetaTrader 4 – RSI Indicator selection

Here are some examples of trading strategies you can use with the RSI indicator:

RSI Indicator Trading Strategies

RSI OBOS Levels

If the RSI is less than 30, it means that the market is oversold, and that the price might eventually increase. Once the reversal is confirmed, a buy trade can be placed. Conversely, if the RSI is more than 70, it means that it’s overbought, and that the price might soon decline. After a confirmation of the reversal, a sell trade can be placed. The 50 level is the midline that separates the upper (Bullish) and lower (Bearish) territories. In an uptrend, the RSI is usually above 50, while in a downtrend, it is below 50.

Depicted: Example of MetaTrader 4 – Mini Terminal – EURUSD – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

RSI Two Period Divergence

Apply a short 5 period RSI (RSI 5) over the longer (default) 14 period RSI (RSI 14) and watch for crossovers. With the RSI 14, there are times when the market does not reach the oversold or overbought levels before a shifting direction occurs. A shorter period RSI is more reactive to recent price changes, so it can show early signs of reversals. When the RSI 5 crosses above the RSI 14, it means that recent prices are getting higher.

A buy signal is then generated, and a 5 vs. 14 cross should happen when the 5 period (blue) is oversold (below 30). When the RSI 5 crosses below and becomes lower than the RSI 14, it means that recent prices are declining. This is a sell signal. A 5 vs. 14 cross should occur when the 5 period (blue) is overbought (above 80). Experienced traders may find that their trading performance greatly benefits from combining a RSI trading strategy with Pivot Points.

Depicted: Example of MetaTrader 4 – EURUSD – ECN Hourly Chart – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

RSI Trendlines

Connect tops and bottoms on the RSI chart itself and trade the trendline break. To draw an RSI uptrend line, connect three or more points on the RSI line as it rises. A down trendline is drawn by connecting three or more points on the RSI line as it falls. The break of an RSI trendline might indicate a potential price continuation or a reversal. Bear in mind that the break of an RSI trendline usually precedes the break of a trendline on the price chart, thus providing an advance warning, and a very early opportunity to trade.

Depicted: Example of MetaTrader 4 – EURUSD – ECN Hourly Chart – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

RSI Classic Divergence

RSI bearish divergence forms when the price forms a higher high, and at the same time the RSI decreases, and forms a lower high. You will usually see RSI divergence forming at the top of the bullish market, and this is known as a reversal pattern. Traders expect the reversal when the RSI Divergence forms. It is an advance reversal warning, as it appears in several candlesticks before the uptrend changes its direction, and breaks below its support line.

Conversely, the RSI bullish divergence will form when the price forms a lower low, and the RSI forms a higher low. This is an advance warning sign that the trend direction might change from a downtrend to an uptrend. RSI divergence is widely used in Forex technical analysis. Some traders prefer to use higher time-frames (H4, Daily) for trading RSI divergence. Using these strategies, you can achieve various RSI indicator buy and sell signals.

Depicted: Example of MetaTrader 4 – EURUSD – ECN Daily Chart – Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admiral Markets (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.

Conclusion: RSI Forex Trading

It is so simple to jump into trading using the Forex RSI indicator, that novice traders often begin trading without testing different parameters, or educating themselves on the proper interpretation of an indicator, because of the desire to grab money quickly! As a result, the RSI has become one of the most widely misused MT4 indicators. Once understood and correctly applied, the RSI has the ability to indicate whether prices are trending, when a market is overbought or oversold, and the best price to enter or exit a trade.

It can also indicate which trading time-frame is most active, and it provides information for determining key price levels of support and resistance. The RSI can provide you with technical trend information, as well as RSI buy and sell signals. It is crucial that you practise RSI trading strategies on demo account first, and then apply them to a live account. Additionally, the RSI strategies can complement any Forex trading strategy that you may have already been using.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Advanced RSI Binary Options Trading Strategy

Video Transcription:

Hello, traders. Welcome to Daytrading Binary Options. In this lesson we’re
going to go through advanced RSI trading.

You’re going to see that the RSI is an excellent indicator for day trading,
because only using this indicator and normal support and resistance levels,
you can actually take a lot of trades and have a lot of good setups and
high probability setups, actually. So let’s go.

What is the RSI? The RSI stands for relative strength index. This is a
momentum indicator that measures the speed and change of price movements.
The RSI oscillates between 0 and 100, and because it compares the magnitude
of recent gains versus recent losses, it can determine overbought and
oversold conditions in the market for any financial asset.

The RSI is considered overbought when it’s above 70 and it’s considered
oversold when it’s below 30. Overbought and oversold conditions help us
determine extremes and turning points in the market. This means that when
the RSI indicates overbought condition, this means that we have reached an
unsustainable level in the market and we are due for a correction.

The same applies with oversold conditions, and we’re going to see the
actual setups later in this lesson.

The RSI also helps us determine the general trend. This is actually a very
good use of the RSI, because sometimes, even though we are in an uptrend,
we can actually be in just a correction of a much larger downtrend. By
using the RSI, we can actually spot these differences in the market and
actually trade with the trend or look for the exact market extremes and
trade the correct direction.

When the indicator oscillates between 50 and 100, it can be used as a
confirmation of a bull market. When the RSI oscillates between 50 and 0, we
are in a bear market.

Let’s see how we identify the trend with the RSI. We already said that when
the RSI oscillates above 50, we are in a bull market and when it oscillates
below 50, we are actually in a bear market.

Let’s have a look at two examples so you can better understand what we were
saying, okay?

Now this is GBP-Aussie dollar four-hour chart. As you can see, we are in a
clear up move after we made this low right here. We continue to make higher
lows and higher highs until we peaked at this turning point. Okay?

As you can see, the RSI was oscillating between 50 and 100. 100 is the
extreme all the way up here. The first line is the 70 level. We have the 50
level, which divides the bull and the bear country. Then we have over here
the 30 level, and all the way down here, the zero level. This is the RSI,
okay?

As you can see here, when we started the uptrend, we crossed over above the
50 level. Then after every little correction, we didn’t go below the 50
level. We just found support here and continued to the upside, then
oscillate between the 50 and the 70. Here we almost get to the 80, 85
level. Then again, okay?

When the RSI is doing this and you have price moving up, you can actually
say that we are in a bull market.

The RSI here is above 50, and you can see that we are in a clear up trend
on the chart.

Let’s see an example of a bear market identification with the RSI. Here we
are in a clear downtrend. The RSI is oscillating below 50. You can see that
clearly here, that once we started this aggressive move down at this peak
right here, the RSI crossed below the 50 level and never went up again. It
just oscillated below the 50 level. This means that we are in a bear
market.

If we are oscillating below the 50 level, we are not going to try to buy
calls on, in this case, the GPB/Aussie. In this case, also the GPB/Aussie,
but in this case we are not going to try to buy puts, because we are
oscillating above the 50 level. Remember, if we are above the 50 level, we
are in a bull market. And in a bull market, we are looking to buy calls.

If we are oscillating below the 50 level, we are in a bear market. In a
bear market, we are looking to buy puts. Okay?

We are only counter trend trading when we actually have the overbought
signal and the oversold signal.

Let’s start with the overbought signal. An overbought signal is a bearish
signal. Price has achieved a high that is not sustainable any more, and we
are due for a correction. The overbought and oversold signals come after
strong moves either to the upside, where people are starting to buy and buy
and buy. Then the market is overbought.

When we a strong move to the down side, is when traders are starting to
sell the asset. Then when the other traders see that the price of the asset
is coming down, they sell it, too, until there are no more sellers and the
market is oversold.

But now we are with the overbought signal, so that means that we have had a
massive, an aggressive buying pressure, that has pushed price to a level
that is not sustainable any more. This is what the RSI is telling us when
we have the overbought signal.

Here’s an example of a bearish or buy put setup, with the overbought
signal. Now this is, again, a GBP/Aussie four-hour chart.

As you can see here, we have an extreme move to the upside. We have a steep
move to the upside. You can see that we broke with this triangle formation
right here. Then we moved all the way up here.

Now you can see that we have achieved what we can call an extreme in the
market when actually we have a couple of candles that are just in a very
choppy range at the top of the up move. This is called a turning point.

Then you go to the RSI and you can see that the RSI is above the 70 level.
This means that we are in an overbought condition in the market, and we are
due for a correction.

When we actually take out this low, I mean this area of support and this
low right here, we have a signal to buy puts. Remember that when the
turning point is all the way up here at the top of a steep up move. Then
the RSI must come down below the 70 level. And ultimately cross to bear
country for us to be able to buy puts on a very non-aggressive matter or on
a very non-aggressive way.

Because if we buy puts at the top of the move, just because we are in an
overbought condition, our option can actually expire out of the money,
because you need to understand that in a very strong up move, the RSI can
stay overbought for a long period of time.

This means that sometimes maybe the RSI just will pull back to the 70 and
move back up if the bullish pressure is too big.

We need for us to have a signal to buy puts on the overbought signal; one,
we have to have a turning point. Two, we have to have the RSI on an
overbought level. Three, we must clear the previous lows. Four, the RSI
must move below the 70 level and ultimately below the 50 level to bear
country.

Now let’s go to the oversold signal, which is the opposite of the
overbought signal. In this case, the oversold signal is a bullish signal.
Price has achieved a low that is not sustainable any more. We are due for a
correction.

This is the same thing. In a very aggressive down move, this happens
because we have a very strong selling pressure on the market. At the end of
this aggressive sale pressure, the market of the asset is in an oversold
condition. When the RSI is in oversold conditions, it is most likely that
we will have a turning point right there.

But remember that we need to use previous support and resistance levels to
get the actual turning point. We need to use the oversold and overbought
conditions on the RSI, with historic support and resistance, but this you
already know. We are going to go through a couple of examples on the MT4
platform, so you better understand what we’re talking about. But in the
meantime, let me show you an example of a bullish setup with the oversold
signal. Okay?

Now this is again the GBP/Aussie four-hour chart. As you can see, we are in
a very aggressive down move. We have moved down from this level to below
the 1.800 level. So yes, this is a very aggressive down move.

No, no. You can see that we have achieved a turning point. A turning point
in the market can be when you see actually that the candles start to not be
as aggressively red as before. You can actually see that one or two things
are happening. We are in a very strong support level and we are finding a
lot of buyers right here, or two, the traders that were short from up here
are just taking profit at a support level.

In any case, you need to use these levels in confluence with an oversold
signal on the RSI. Here you can see that the RSI is way below the 30 level.
When we take out the previous high, we have a signal to buy calls in this
case, because we are in an oversold signal or an oversold setup.

Now remember that we need the RSI to go above 30 and ultimately above 50
for us to have a true trend change or change in the trend. Because what you
need to understand that if we are in a very aggressive down move, and we
have achieved a turning point.

In this case, the RSI goes above 30, but if it fails to go above 50, we can
be trapped just in a correction of the down move. In any case, let’s
imagine that this is the 15 minute chart. We have achieved this turning
point. We already had our historic support and resistance levels. In this
case, support, of course, and we see that we have a very strong buying
pressure building up at this level.

We see that the RSI crosses above 30 and we take out the previous high
right here. In this case, we can buy calls, because we are just trading the
oversold signal. We are not trading the trend. We are not swing trading. We
are just trading the move to the upside or the correction.

Let’s imagine that this is a 15 minute chart. If we are analyzing price
action in the 15 minute chart, you need to choose an hourly expiration
option. In this case, 1, 2, 3, 4, we would have expired in the money on
this setup.

There you go. This is the overbought and oversold setups or signals. As you
can see, they are very easy to spot, but you need to use them in
confluences with historic support and resistance, because on this historic
support and resistance is where you will find buyers and sellers. And if
this confluences with an oversold or overbought signal of the RSI, it is
very likely that you will have a setup just like the ones we just saw on
the slides.

But in any case, we’re going to go through a couple of charts after the
actual lesson on the MT4 platform, so you can see how I find these spots to
trade binary options.

The first setup we’re going to go through or the second setups we’re going
to go through are divergences. And we’ll start with a bearish divergence.

A bearish divergence occurs at the top of an up move. You already know
this. It’s when the RSI is making lower highs and prices making higher
highs. This means that price is diverging from the RSI readings.

This is clearly simple. You already know this, but you need to understand
it again, for the RSI.

Here’s an example of a bearish divergence, where we’re going to look for
opportunities to buy puts. Here’s the GBP/USD daily chart. As you can see,
up until this high, we were in a very nice up move. These are daily
candles, so this is a three month up move to this high. Prices making
higher highs.

We go to the RSI and we can see that the high that price made here is the
high that the RSI made here, right here at the 70 level. When the price
made a higher high, the RSI actually made a lower high. This is what we
call divergence. At the top of an up move, it’s a bearish divergence. It’s
a bearish divergence, because we have signals to buy puts. Okay?

The actual signal occurs when we take out the previous low. Because we are
in an up move, we need to break structure for us to be able to buy puts.
When we break structure is when we actually break with this low, because
when we break with this low, we are making lower lows. So we are no longer
in an uptrend when we are actually making higher lows.

So when we break this low, we have here a very nice signal to buy puts on a
bearish divergence setup. Here’s the breakout trigger for an excellent move
down.

Here you see bearish divergences. We actually caught the move at the top of
it. So if we are trading on the longer time frame or the longer term, we
would actually end up in the money whether we are swing trading or if we
are day trading and this is actually a one hour chart, we would have ended
up in the money, too, if we would have been trading end of day expirations
for day traders.

So this is basically what a bearish divergence is.

Let’s go through what bullish divergences are. Bullish divergences occur at
the bottom of a down move. The RSI is making higher lows and the price is
making lower lows.

Let’s go through an example. It’s pretty easy. Here you can see that on the
daily GBP/USD, we are in a very nice down move, even though we made a very
deep correction to this high right here, we continue to make lower lows.

Now, you can see that here at this bottom, price made a lower low right
here. And the RSI was making higher lows. So this is what we call a
divergence. But the actual setup is not ready yet. The actual setup occurs
when we have the breakout trigger. When we breakout with the previous high
and when we do so, we have here a trigger or a signal to buy calls.

Remember that divergences are not enough for us to get in the market,
because that is too aggressive. You need to wait for the actual breakout
trigger for you to be able to buy binary options on any currency pair or
instrument that you are trading.

The third type of setups that we are going to learn here are positive and
negative reversals. Positive and negative reversals are the actual opposite
of bearish and bullish divergences. Let’s see why.

A positive reversal is a bullish signal. The RSI is making lower lows and
not at oversold, but between 30 and 50. They can be a little bit below 30,
but you need to understand that these are not divergences. Well, these are
divergences, but they are not extreme divergences as we just saw on the
previous slides.

Now the RSI is making lower lows and prices making higher lows, so a
positive reversal occurs at the end of a down move. Of course, you are
looking at something like this.

Actually, a positive reversal can also be considered as a continuation
divergence. Sometimes it occurs when prices making the correction in the
middle of an up move.

But let’s have a look at what you need to look for. Here, you can see that
price is making higher highs. I mean, higher lows, I’m sorry. And the RSI
is actually making lower lows. This is what we call a positive divergence.

As you can see here, we come from this down, this low right here, we made
this high. We made our higher low. A higher high. And another higher low.
So we are actually in an uptrend. So this can be considered as a
continuation pattern or continuation divergence.

Prices making higher lows and the RSI is making lower lows. When we break
with the previous high, which is this one, right here, we had the breakout
trigger and the signal to buy calls on this currency pair, in this case the
GBP/USD one hour chart. If we are trading the one hour chart, we should be
okay with trading the end of day expiration options, which would have
expired in the money in this case.

The last setup we are going to learn is called negative reversal. A
negative reversal is a bearish signal. This occurs when the RSI is making
lower highs and not quite at overbought, but between 50 and 70. Price is
making higher highs.

Let’s go through an example. Right here you can see that price is making
higher highs. And the RSI is making lower highs. Because price is making
higher highs and the RSI is making lower highs, we have a negative
reversal, which is a bearish signal. We will look for a trigger to buy puts
in this case.

When we break with the previous low, in this case, this one right here, but
here we tested it again. We broke it all the way here. When we break with
this low, we have a breakout trigger and a signal to buy puts in this
currency pair. Again, since we are analyzing the one hour chart, we should
be trading the end of day expiration options, which would have expired in
the money in this case.

If you are trading the 15 minute chart, you may choose an hour to two
hours, an hourly to a two hour expiration option, because you want to give
your trade a little bit of air to breathe or space to breathe, okay? Or
some time to move in your favor. But I mean, if you’re analyzing on the 15
minute charts, you don’t want to trade the end of day expiration options,
because that is just way too high of an expiration for such a low time
frame to be analyzing on.

In any case, this is the negative reversal. Again, we’re going to go
through a couple of charts on the MT4 platform in a little bit.

Now, let’s have a look to how to trade with the RSI and the basic rules.
Here are the general rules.

The overbought and oversold signals have to be used with previous lows and
highs as triggers. In a steep up move, the RSI can stay overbought for long
periods of time. Remember.

In an aggressive down move, the RSI can stay oversold for a long period of
time. So you need to be careful with that and with practice, you will learn
how to spot these aggressive up and down moves and how to avoid to be
caught in a false setup, in a false signal.

When spotting turning points, you must always use support and resistance
levels as rejection zones. Remember that having a divergence or having a
turning point with an overbought signal is just not enough. You need to use
historic support and resistance, because you need to know where the buyers
are going to be placing their market or the sellers, too, if you are
looking to buy puts.

In any case, you need to use these levels, because without them, it will be
very hard for you to profitably trade with the RSI.

Here are the trading rules. If you are analyzing the 15 minute chart,
choose an hourly to a two hour expiration option. If you are day trading,
analyze price action on the hourly and choose an end of day expiration
option. The setups are the same for any timeframe and any asset.

Right now, we’re going to go to the MT4 platform.

Welcome back, and here’s my MT4 platform. As you can see, I have a lot of
charts tiled up in here, but we’re going to focus on these four or five
charts right here, which are the major currency pairs.

Let’s start with the euro/US dollar four hour chart. Here’s a naked chart
of the Euro/US dollar. To add an indicator, you already know, you go here.
And you go to “trend,” and you choose the relative…no, I’m sorry. Go to
“oscillator” and you choose the “relative strength index.”

The default setting is a 14 period RSI. I’m going to show you the
difference between the 14 period RSI and, let’s say, a five period RSI. The
only difference is that the RSI is going to react quicker to price and we
have more spikes if you choose a lower period for it. Okay?

We are fine using the 14 period RSI for our trading.

What you need to understand here is that once you plug the RSI, you need to
draw your historic levels. Right here we have this low, that got broken,
tested here, broken, and well, we chopped around it before we broke to the
down side after we broke out of this triangle. Okay? This is a triangle
formation. Just trust me.

All right. As you can see here, the first thing you need to understand here
or you need to see or you need to look for is this. After this step down
move, when we broke with this up structure, we have here the breakout or
when the RSI moved below the 50 level. And we continue to trade below the
50 level, all right. If we are trading below the 50 level, we are in a bear
market, exactly.

Even though we have some kind of correction here, you can actually see that
we are not looking to buy calls any place. We are actually looking for a
spot for us to continue or to trade to the downside.

Here with the RSI, we don’t have any clear setups on the Euro/US dollar,
because as I already told you, we are not in an aggressive move, just like
this one, that gave us an opportunity to buy calls in a correction, because
the RSI never moved above the 30 level. It continued on an oversold
condition until we achieved this area of support that then we broke. We
broke to the upside, but we continued to trade or the RSI continued to
oscillate below the 50 level, so we don’t have any clear setups on the
Euro/US dollar.

Let’s go to the US dollar/Canadian dollar. Let’s try the 15 minute chart,
okay? There you go. Here’s the 15 minute chart on the US dollar/Canadian
dollar. As you can see what happened here, let me just get rid of the
expansion on the trend line. On my MT4, and you can see that here, we have
higher highs on price and here we have lower highs on the RSI. When we
break with this level right here, we have actually a signal to buy puts on
the US dollar/Canadian dollar.

The thing is that right now, it’s 4:30 in the afternoon. There’s no
sessions open. There is low liquidity in the market. That’s why you can see
that we are chopping and we are moving in a very choppy and tight, tight
range.

Here, even though we had divergence, it’s not a good sign to buy puts or to
be trading at all.

What you need to understand is this, okay? We are looking for volatility
and we are looking for momentum. If we go further back, you can actually
see that we might find some good RSI divergence or just [topping] setups.

Right here you can see that the RSI actually…this is what we call a mild
divergence, because the price is not making higher highs, but we have
actually some kind of a double top. Just check this out, okay? We came from
this low and we moved up, all the way up to this high.

And when we moved to this high, the RSI made this high right here. Right
above 70. Then we continued to the downside and we tested again. This same
area of resistance. And the RSI made a clear down, lower high, I’m sorry.

When we see these we can actually see that we have a mild divergence. This
is a mild divergence because even though we didn’t make a higher high, we
have a divergence with the RSI reading.

When we cross and we take out this low, you can see that we are in a clear
option, because we are making higher lows and higher lows. When we break
with this low right here, and of course, with the up structure and the RSI
after the divergence moves below 50, we have a clear signal right here to
buy puts for an hourly expiration that would have [expired in] the money.

This is how you actually look for divergences with the RSI. We didn’t even
have to use historic support and resistance. We only used this previous
spike highs that were held right here for our trade.

Basically this is how you do it. If you want, we can go through another
chart. This time we’re going to go through the hourly, New Zealand
dollar/US dollar chart. Let’s go and let’s put on a 14 period RSI on our
chart.

Okay, so let’s start with the drawing levels. This is a previous low and a
previous support level right here. Okay, this is at the entire resistance
support area, I’m sorry. That was broken here and retested here.

This is where the RSI comes in handy, okay? We are making higher…we are
actually in an uptrend. So you draw your trend line right here. You can see
that it was very clearly respected before we moved up, okay? Right here we
had a spike high to these lows right here, which are now resistance,
because before they were support and the RSI shows a very overbought
signal.

But the thing about this is that when we break with these lows right here
on the hourly, of course. This is the hourly. When we break with these lows
right here, we have to wait for this candle to close. We close all the way
down here, okay, which are previous highs.

When we close all the way down here, we can see that the RSI actually held
the 50 level. So we don’t take the trade just now. We wait for another pull
up to the area of resistance. When we have a clear crest below the 50
level, when we break with this low right here, here is where we have our
signal to actually buy puts on the New Zealand dollar/US dollar.

Now let’s go through again. Let’s go again through the differences between
these two. Even though we had a very, very overbought condition or
overbought reading on the RSI, when we came down and when we had actually
the trigger or well, the breakout trigger, we saw that the RSI held the 50
level. This means that we had a lot of buyers here on this previous high.

Remember that previous highs, this high is a small resistance area. When we
break it and when we retested it, we retested it as support, so we have
buyers here. And these buyers moved price up all the way up to the
resistance zone.

When we moved again to the resistance zone, we massively broke a structure
again. And the RSI moved below the 50 level. When the RSI moved below the
50 level, we moved to bear country and we have here a signal to buy puts on
the NZD/USD.

You have to be…I mean, this is advanced RSI trading. These are not
automatic signals that you just take blindly. You need to think about where
the buyers are, where the sellers are, where are the levels that I need to
break for me to be able to buy puts or calls on these currency pairs or
whatever asset it is that you’re trading?

Just think about it. Go back and go through every RSI setting. Just here we
had a very nice, for instance, bounce of the 30 level. When we have a
bounce of the 30 level, then we cross above the 50 level, we have here,
boom, a very nice and clean signal to buy calls.

This is the kind of setup that you need to be looking for. For instance,
here we have a very nice divergence when price makes lower lows and the RSI
makes higher lows. We move above the 50. But remember that we need to break
with this high right here and with basically, when we broke with the high,
we had what we call a fake setup, even though we had the divergence and the
break above the previous high right here, you can see that we made what we
call actually an inverted pin bar, which is a signal of a rejection of the
level, so we would not take this trade.

If there are aggressive traders out there, you can actually take, buy calls
here at support on the second lower low, when the RSI is making higher
lows. But the thing about it is that if you take a trade here and you buy
calls here, you’re going to know how many time it will spend ranging here
before it moves above, before it moves up.

Actually, when you break with a previous high, you know that you will have
momentum to take price up and your option to expire in the money.

So these are the things that you need to look for and you need to practice
with the RSI.

RSI Trading Strategies

RSI Trading Strategies

RSI indicator (Relative Strength Index) is one of the main oscillators used in technical analysis. This instrument helps to assess pricing dynamics against the previous values.

RSI offers a chance to define the market sentiment and spot the points at which the market is overbought and oversold.

It is also used to detect times when the price is about to reverse, and a new trend rises.

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Table of Contents

Features and Advantages of The RSI Indicator

As any other oscillator, the RSI indicator is not plotted on the price chart, but in a separate window below. This technical instrument consists of a single line and two levels set by default.

Vertical axis range of the indicator is set to 1 to 100 showing extremality of current price against its previous values.

RSI values calculation

What the formula means, is that if the price grows against previous values, so does indicator reading; otherwise, oscillator’s value goes down.

The RSI line may reach 0 or 100 only during strong, continuous downward or upward trend, respectively.

Usually standard overbought and oversold levels are 70 and 30. If the indicator’s line goes above the 70 level, it signals that market is overbought and the trend may reverse downwards.

If the indicator’s line goes below the level 30, it signifies that market is oversold and the trend may reverse upwards.

The reference level is 50, and it is the median value. If the indicator chart is ranging between the levels 30 and 70, the market is flat or that the current trend is smooth, steady and there is less of a likelihood for reversal in short-term

Sometimes, overbought and oversold levels are set at 80 and 20 instead of 70 and 30. This setting is used during increased market volatility.

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Setting and Adjusting RSI Indicator

There are two ways to set up this indicator. The easiest way is to click the tab ‘List of Indicators’ located on the upper panel of the terminal and select ‘Oscillators’ – ‘Relative Strength Index’.

Another option is to choose ‘Insert’ – ‘Indicators’ – ‘Oscillators’ – ‘Relative Strength Index’.

Instrument configuration window will open before the indicator is set in the chart. This window allows you to configure the indicators parameters.

The main parameter is the period; It defines the number of price values taken into consideration at plotting the main indicator’s line. The shorter the period, the steeper indicator’s chart movements will be.

This parameter is set to 14 by default, and this setting is considered optimal in most cases. You can also adjust the style settings, like line colour and weight.

By using another tab of configuration window, you can change parameters of the levels from 30 and 70 to 20 and 80. You can also add new levels should your trading strategy require so.

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Opening Positions on RSI Signals

The main signal the RSI oscillator generates allows defining overbought and oversold price ranges.

Although it is frequently used as a filter in systems where the main indicator is a trend one, it might be possible to try trading using RSI signals only.

When indicator’s line goes above the level 70 or below the level 30, it signals that market is overbought/oversold, and it is necessary to wait for the next signal confirming a trend reversal.

These are the rules for opening positions based on the RSI signals:

  1. If the indicator’s line crosses the level 70 from above, a short position (Sell) is opened.
  2. If the indicator’s line crosses the level 30 from below, a long position (Buy) is opened.

There are several conditions for closing a trade:

  1. Place a Stop Loss to local extremum and Take Profit to the value that is by 2-3 times greater.
  2. Exit on opposite indicator’s signal.
  3. Place a Stop Loss and Take Profit to the nearest key levels or Fibonacci (here Take Profit level should be not less than Stop Loss otherwise it is better to hold back and avoid opening a trade).

However, trading using RSI signals only is not the best approach as it has been designed to be used as a filter and not the main instrument.

A trading strategy will be more efficient when using a trend indicator or at least paying attention to the Price Action signals.

Combined Strategy using Stochastic + RSI

In order to boost trading efficiency, it’s best to use the Stochastic Oscillator. The absence of trend indicators in this trading strategy is compensated by simultaneous analysis of two timeframes.

This way the oscillators will filter each other’s signals and trades will be opened only when both indicators give the same signals on different time frames.

This strategy suggests using time frames of Н4 and М15. In Н4, the RSI will have the default settings.

The only difference will be that instead of levels 30 and 70 we will set it at 50. In М15, Stochastic will have default settings.

Short position (Sell) will be opened in the following case:

  1. In Н4, the RSI line is crossing the level 50 from below.
  2. In М15, Stochastic lines exit overbought zone and heads down.

Long positions (Buy) will be opened in the opposite case.

Stop Loss and Take Profit are fixed and set at distances 20 and 50 points from the opening price respectively.

Such ratio enables to obtain a positive statistical expectation from trading in the long run.

It is recommended to check the economic calendar before opening positions in this trading system since the release of important news can significantly influence price movement, and technical analysis won’t be relevant at this very moment.

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Advanced Strategy RSI + Stochastic + МА

Finally, let’s consider strategy with three classic indicators filtering each other as a single set and giving powerful signals for entering the market.

This strategy fits best for trading on Н1, Н4 and D1.

First, it is necessary to set up the following indicators in the chart:

  1. A moving average with the period of 10.
  2. An RSI with standard settings (levels 70 and 30).
  3. A Stochastic oscillator with standard settings (levels 80 and 20).

According to this strategy, a long position is opened when the following signals are generated:

  1. Price is crossing МА from below.
  2. RSI and Stochastic exit oversold zone.

All three signals should be received during three candles, otherwise, they will lose their value.

Short positions (Sell) should be opened in the opposite case.

Exiting an open trade should be done when RSI enters the opposite zone. Sometimes, an opposite position can be opened simultaneously with closing previous position, granting other signals to follow the aforementioned pattern.

Conclusion

The RSI is one of the main indicators of technical analysis, and almost all the forex trading experts think that it is still very useful and valuable as a source of trading signals.

The success of trading with an RSI depends on using additional indicators in conjunction with it.

Combined with the right indicators, RSI forms an efficient system, which can be fine-tuned by amending the parameters of instruments used.

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Trading in financial markets puts your capital at risk. It is recommended to accurately follow the money management rules and always set Stop Losses to reduce risks. This article doesn’t constitute an investment/trading advice.

We recommend you to visit our trading for beginners section for more articles on how to trade Forex and CFDs.

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