The Relative Strength Index is one of the key oscillators globally used. If you turn on local or even foreign financial news and take a close look to charts shown there, the likelihood of RSI’s appearance will be very high. This indicator reflects so-called ‘momentum’ - the speed and amplitude measuring the price change.
In other words, we can analyse the strength or weakness of the current market price conditions. The indicator is based on using close prices in a certain period, which gives an opportunity to increase predictions’ time-tested efficiency.
As a result, the RSI oscillator is used everywhere - for stock indices, futures and options contracts, currency pairs and even to predict Thursday’s rain. Long story short, RSI is exactly what doctor prescribed to a poor binary options trader.
This indicator is reliable, simple and ultra-popular. The only thing to add here is how to use it in binary options trading.
We open advanced charts, choose Relative Strength Index in the ‘indicators’ box and add it to the chart.
The creator of RSI is J.Welles Wilder. That famous trader also developed another popular indicator, which is Parabolic SAR. Welles is another example of how aside people come into trading. He used to be a regular navy technician, after what he worked as a mechanical engineer for many years. But the salary, as you could imagine, was obviously too scarce, that’ why Welles was simultaneously trying to trade on the stock exchange.
Here are some of Wider’s quotes:
The formula is very simple and understandable for an 11-year-old school student.
RSI = 100 - 100/(1+RS)
RS = average gain / average loss.
We have already figured out that RSI shows the momentum, strength and amplitude of the price. The indicator is displayed on a scale from 0 to 100.
Let’s consider several basic scenarios for using the Relative Strength Index.
Overbought and Oversold conditions.
According to RSI creator’s opinion, when the current price moves fast and the indicator jumps up rapidly, that means that the price is in the overbought territory and the price action will be exhausted very soon. And then it could even start falling.
The opposite statement is also fare. If the RSI dropped down, we can observe oversold conditions and it’s worth patiently waiting for the action reversal.
The levels are:
Any oscillator has an effective instrument - divergence - and RSI is not an exclusion. Divergence works well for any indicator including MACD, stochastic and many other oscillators. RSI has the same picture. The key importance of divergence is that the indicator is moving in the opposite direction to the price action, which points to a potential reversal.
This is an example when we completely ignore the price itself. The only thing to monitor is the RSI.
The internal (intra-border) reversal consists of 4 simple stages.
A bullish turn (for the price to reverse upwards):
Every trader passionately expects the price to reverse. However, it would be a mistake to consider that very divergence leads to the price reversal. It does not work like that. If a trend is really sustainable and strong, then a divergence could only confirm that. Andrew Cardwell wrote a lot about that. According to his observations, the RSI divergence can confirm the trend’s strength but not deny it. The same was as it’s shown on the daily chart below:
That proves one more time that all of the technical analysis possibilities have to be used in a trend assessment. Whereas the strong trend will be confirmed by many technical indicators but not point to an unavoidable reversal.
Learn how to determine trends. A strong trend suggests other rules than in a sideways consolidation range.
We’ve already seen the example of a divergence mentioned above. That’s when the price goes up, RSI slides lower, being completely correct regarding the upcoming reversal.
Cardwell described inverse divergences when everything is upside down:
If you like RSI: Relative Strength Index, you might also be interested in this Best Binary Rules for opening contracts in binary options
What happens if one of the ultra-popular technical indicator - Stochastic - is combined with another one? We’ll get Stochastic RSI, two shampoos in one bottle.
The only thing we need to feel the difference is to add all three options (RSI, Stochastic RSI and Stochastic) to the chart as shown below:
As you can see, Stoch RSI is the indicator which took best parts of both RSI and Stochastic. In fact, that’s a more comfortable and smoothed version of traditional stochastic. Actually, many experienced traders use this version of the stochastic oscillator on daily basis. It perfectly works for the 5-minutes timeframe and larger. But for the 1-minute chart, it’s better using traditional stochastic as it’s much faster.
Here comes another popular pair.
What’s the main thing in MACD? Right, the cross of its lines above or below zero. Good, smooth and confident cross. What RSI can help here with is to confirm that cross.
Configuring RSI is very easy. Actually, all we can change is the period which is equal to 14 bars by default. And that’s a good value which should not be changed without any special need.
Style tab allows you to change indicators’ visual style:
Honestly speaking, it’s the fourth decade since Relative Strength Index does not leave traders in peace around the globe. If you went to some paid technical analysis courses, we bet they will surely tell you about RSI. Actually, this indicator is considered the best one to create market metrics and different trading strategies and systems. It only seems that RSI is simple like nose hair - in fact, impressive depth is hidden in this indicator and it’s fascinating to discover them. Don’t even think to apply RSI blindly, as for any other technical indicator. Try to experiment. Add it to the chart and watch what does it show. Don’t rush to place your bets - the train is not going anywhere. The price, its development pace, the market depth - all of that can be monitored with help of RSI.
You can choose the needed type of account at any time!