The Relative Strength Index (RSI) is the most powerful technical analysis indicator in price action analysis for traders. Today, I will introduce you to RSI indicator, its divergence, formula and how to use it in binary options trading.
Video on binary options trading using RSI indicator
What is RSI indicator?
RSI indicator stands for the Relative Strength Index. It is used as an oscillator indicator to measure the speed and change of price movements. RSI ranges from 0 to 100 to measure overbought and oversold of the market. In analyzing, using RSI can help you identify reversal points at peaks and troughs of price trends.
The RSI indicator consists of 3 main elements.
- RSI line (light blue) is the line that runs along with the price chart, indicating the change and speed of price movements. Usually, this line ranges from 30 to 70. But sometimes it touches or breaks out of the 30 or 70.
- The overbought zone (from the overbought line (70) and above) is the zone to which the RSI reaches signaling that the price has gone up too high. This is a signal that predicts a temporary reversal from up to down.
- The oversold zone (from the oversold line (30) and below) is the zone to which the RSI reaches signaling that the price has fallen too low. It predicts that prices will temporarily reverse from down to up.
How to use RSI indicator
Method 1. Used to identify price trends
This is the basic signal for RSI. As observed, when the RSI rises and moves from the oversold zone (30) to the overbought zone (70), the price goes up. And vice versa, when it heads down and goes from the overbought zone (70) to the oversold zone (30), the price is in a downtrend.
Method 2. Predicting a price reversal based on the RSI indicator divergence
Divergence is one of the most accurate characteristics of RSI indicator. It shows through the opposite reaction of this indicator compared to the direction of the price.
RSI bullish divergence:
The price is in a downtrend, creating 2 consecutive troughs. The following trough is lower than the previous one but the RSI is rising. This is a very reliable signal for you to predict the price will reverse from falling to rising.
RSI bearish divergence:
The price is in an uptrend, creating 2 consecutive peaks. The following peak is higher than the previous one but the RSI is falling. After this divergence, there will be a downtrend.
Two methods for trading binary options using RSI indicator formula
Method 1. Trading using RSI divergence
This method purely uses the RSI because you only need to observe it for opening options. At the same time, you can use the 2 support and resistance lines for identifying entry points
Conditions: A 5-minute Japanese candlestick chart. The expiration time of 15 minutes (time for a transaction is 15 minutes).
How to open an option
+ Open an UP option right after the RSI bullish divergence appears. The price touches the support and bounces back higher.
+ Open a DOWN option right after the RSI bearish divergence appears. The price touches the resistance and bounces back lower.
Method 2. Combining with the Heiken Ashi candlestick chart
This combination uses the trend signal of RSI combined with Heiken Ashi candlestick. This is a very effective candlestick in trend trading.
Conditions: The 5-minute Heiken Ashi candlestick chart. The expiration time of 15 minutes to 30 minutes.
How to open an option
+ Open an UP option when Heiken Ashi candlesticks turn from red to green and the RSI heads up from the oversold zone (RSI crosses the 30 line and goes up)
+ Open a DOWN option when Heiken Ashi candlesticks turn from green to red and the RSI heads down from the overbought zone (RSI crosses the 70 line and goes down)
Notes when using RSI indicator in binary options trading
- Do not use the RSI indicator to confirm the entry point. All indicators go after the price. Therefore, there is always a certain lag from the indicator compared to the price.
- The RSI is best used when combined with signals from candlesticks and candlestick patterns.
- Do not trade with a short expiration time of fewer than 5 minutes.
Using RSI is a skill you need to pocket on your options trading journey. This is an indicator used a lot by successful traders. Experience and familiarize yourself with RSI on a demo account. I wish you successful transactions.