› Relative Strength Index - RSI

Relative Strength Index - RSI

Relative Strength Index is one of the most widely-used oscillators in Binary Options trading. A trading strategy based on RSI is a set of rules and conditions developed to get the maximum benefit from the technical indicators strengths. This article is aimed to provide a detailed explanation of the strategy, pros and cons of the RSI oscillator, steps to increase efficiency in trading binary options, as well as several additional technical indicators to use with RSI.

Besides traditional features of an oscillator, RSI has additional powerful signals and patterns to describe market conditions and point to a possible future direction of the trend. What’s more, the indicator is flexible and multi-purpose as it works well for any underlying asset on any timeframe. Changing the indicator’s period allows binary options traders to filter unnecessary market noise or increase the sensitivity. Relative Strength Index also works well in combinations with different technical indicators having an entirely different mathematical background. Before we dive deep into the practical usage of the strategy, we should recall the basic theory.

What is the Relative Strength Index?


Relative Strength Index (RSI) is a multi-purpose flexible oscillator ranging from 0 to 100, showing overbought and oversold conditions. Also, the indicator points to a high likelihood of a reversal price action in case if so-called divergences occur. When crossing the middle line, RSI indicate a change in market sentiment and momentum.

The main advantage of the Relative Strength Index is that it is a sensitive oscillator measuring the market’s momentum. The indicator has several applications in the technical analysis, it can work alone or in combinations with other technical indicators. RSI has several patterns showing both continuation and reversal of the recent trend.

How to read relative strength index?


The indicator is placed in a separate window under the price chart. The screenshot below shows how the RSI indicator looks like.
Relative Strength Index - RSI

RSI indicator settings


Default RSI settings are as follows:

  1. Period - 14 bars (days or hours depending on the chosen timeframe of the price chart);
  2. Overbought level - 70. Traders can set 80 as the overbought level to lower the indicator’s sensitivity;
  3. Oversold level - 30. It can be shifted to 20 if traders prefer lowering the threshold;
  4. Source - close price. The RSI calculation can be applied to open, high or low rates.


Relative Strength Index - RSI

The main parameter in RSI settings is the period as it determines the number of previous candlesticks values for the oscillator to take into account. The lower the period is the more sensitive indicator becomes. And if traders enlarge the period, they get a slower oscillator as a result. For example, RSI line will be more flattened with the period of 21 bars. And if the period was set to 9 bars, the curve will have a sharper form with a larger number of whipsaws.

How to calculate RSI


RSI indicator formula is simple and it consists of two steps of calculations and three parameters: Average Gain, Average Loss and the number of values (period). Before using RSI calculator for the current market conditions, the first step of calculation has to be provided in order to get the initial Relative Index Strength value.

Relative Strength Index formula is shown below:

RSI = 100 - [ 100 / (1 + Average Gain / Average Loss) ]

After the initial value for the default period of 14 bars is calculated, there has to be a smoothing of the formula:

Relative strength index calculation = 100 - [ 100 / [ 1 + (Previous Average Gain * 13 + Current Gain) / (Previous Average Loss * 13 + Current Loss) ] ]


This operation has to be made for every single bar. As a result, the oscillator has a row of values represented by the line in the indicator’s window.

RSI indicator signals


As long as the oscillator is multi-purpose and flexible, it has several patterns, which can be used to predict the direction of the trend, show overbought and oversold levels, as well as forecast possible reversals. Let’s have a closer look at some of the RSI patterns and trading signals.

Continuation patterns

Imagine a market situation when an underlying asset price bounced off a support level and started strengthening. The main RSI indicator level to assess possible bullish continuation, in that case, is the middle line (value 50). If the oscillator breaks the line (crosses it from below), then technical analysts may conclude that the market momentum has changed to bullish. Thus, the continuation of the upside swing of the price is likely. Here is an example.

Relative Strength Index - RSI

Another example of the bullish continuation pattern is shown on the hourly chart of USD/JPY below. RSI breached the overbought line of 70 from below, bounced back down, but remained in the overbought zone (see the green arrow in the indicator’s window). In most cases, this pattern suggests a bullish continuation of the underlying asset price as the oscillator points to a strong bullish momentum.

Relative Strength Index - RSI

Reversal pattern

When RSI bounces off oversold or overbought level without crossing it, this pattern could lead to a bullish or bearish retracement, respectively.

Here is an example of a bearish retracement on the hourly chart of GBP/USD:

Relative Strength Index - RSI

If the oscillators line crosses the oversold threshold from below after being in the oversold zone for a while, this pattern could also signal a bullish reversal.

Relative Strength Index - RSI

Another example of a reversal pattern is a so-called bullish or bearish divergence. The bullish divergence occurs when the price keeps charting lower lows, while the indicator draws a sequence of higher lows. The bearish divergence occurs when the sequence of higher highs on the price chart comes together with lower highs of RSI value.

Here are some examples:

Relative Strength Index - RSI


Relative Strength Index - RSI

How to use RSI indicator?


RSI indicator have to be considered according to the context of the previous price action. Every single pattern or a trading signal itself is not a guide for action. Binary options trading and analysis suggest taking into account many factors, and RSI trading algorithm is not an exception. What’s more, market conditions could change rapidly, thus traders should be flexible in terms of quick reaction and sometimes ignorance of trading signals coming from the RSI oscillator. Nevertheless, the RSI indicator is one of the most widely-used and effective technical tools to predict the market and make money from trading on binary options.

Below is a list of conditions to use RSI for profitable trading decisions:

Conditions to buy call options on bullish divergence:

  • If a sustainable downtrend was noticed with a sequence of lower lows on the price chart, while the RSI line drew a sequence of higher lows, then a bullish divergence occurred.
  • The number of downside whipsaws has to exceed two or three bottoms in the indicator’s window;
  • Start buying call options on a bullish breakout of the previous low. RSI has to head north;
  • If RSI charted another bottom lower than the previous low, stop the trading cycle;
  • Continue the trading cycle of buying call options if RSI crossed the middle level (50) from below;
  • After that, keep buying call options in case if RSI is edging higher;
  • If the oscillator dropped back below 50, stop buying call options;
  • If RSI bounced off the overbought level after charting several green candlesticks, stop the trading cycle.

Conditions to buy call options crossing the level of 50 from below:

  • After a downtrend reversed and an asset price had found a bottom, RSI should start edging higher from the oversold or bearish territory;
  • If RSI breaks above 50, start buying call options;
  • Keep the trading cycle if the asset price is heading into the right direction and RSI is charting higher highs;
  • Continue the trading cycle until RSI reached the overbought territory or bounced off it;
  • If RSI bounces back below 50, stop buying call options.

Conditions to buy call options bouncing off the support level:

  • Several values of RSI oscillator can be considered as a support level depending on previous market conditions;
  • During a downtrend, the oversold line should act as support;
  • If the price retraced from the peak after charting a sustainable uptrend, while RSI went off the overbought zone, but remained above 50, the middle line will play a role of the support level (bounce-by-trend pattern);
  • If RSI went into the overbought zone, retraced back but remained above the level of 70, that line should also be considered as support;
  • If RSI indicator bounced off the support line according to one of the conditions described above, start buying call options;
  • Continue the trading cycle in the same direction until RSI charted an opposite reversal signal.

Conditions to buy put options on bearish divergence:

  • If a sustainable uptrend was registered with a higher-highs sequence of rates on the chart, while the RSI line drew a sequence of lower highs, then a bearish divergence occurred.
  • The number of upside swings has to exceed two or three peaks in the indicator’s window;
  • Start buying put options on a bearish breakout of the previous high. RSI has to head south;
  • If RSI charted another peak higher than the previous high, stop the trading cycle;
  • Continue the trading cycle of buying put options if RSI crossed the middle level (50) from above;
  • After that, keep buying put options in case if RSI is edging lower;
  • If the oscillator jumped back above 50, stop buying put options;
  • If RSI bounced off the oversold level after charting several red candlesticks, stop the trading cycle.


If you like this strategy, you might also be interested in this Hanging Man Strategy
Conditions to buy put options crossing the level of 50 from above:

  • After an uptrend reversed and an asset price had found a top, RSI should start edging lower from the overbought or bullish territory;
  • If RSI breaks below 50, start buying put options;
  • Keep the trading cycle if the asset price is heading into the right direction and RSI is charting lower lows;
  • Continue the trading cycle until RSI reached the oversold territory or bounced off it;
  • If RSI bounces back above 50, stop buying put options.

Conditions to buy put options bouncing off resistance level:

  • Different lines of RSI oscillator can be considered as a resistance level depending on previous price action;
  • During an uptrend, the overbought line should act as a resistance;
  • If the price retraced from the bottom after charting a sustainable downtrend, while RSI went off the oversold zone, but remained below 50, the middle line will play a role of the resistance level (bounce-by-trend pattern);
  • If RSI went into the oversold zone, retraced back but remained below the level of 70, that line should also be considered as resistance;
  • If RSI indicator bounced off the resistance line according to one of the conditions described above, start buying put options;
  • Continue the trading cycle in the same direction until RSI charted an opposite reversal signal.

Examples of using


Buying call options on a bounce from an oversold level:

Relative Strength Index - RSI

Buying put options on a bearish divergence:

Relative Strength Index - RSI

Buying call options with a bounce-by-trend pattern:

Relative Strength Index - RSI

Buying put options on a breakout of the RSI middle line from above:

Relative Strength Index - RSI

Additional indicators for the strategy based on RSI


Like any other oscillator, relative strength index (rsi) can deliver false trading signals as it is fast and sensitive. Sometimes the market noise could force RSI indicator to chart some of the continuation or reversal patterns described earlier. Therefore, trading signals coming from the indicator could be false or the workout could be so fast that binary options traders would not have a chance to benefit on the formation.

This is why additional technical indicators may be needed to increase the efficiency of a trading system, lower the number of false trading signals and reduce the market noise. The main requirement for the secondary technical tool to use together with Relative Strength Index is that it has to be slower. Such trend indicators with a lower response sensitivity such as MACD, Ichimoku Cloud and Average Directional Index could be applied in an effective combination with RSI indicator.

Different types of moving averages with several periods and envelope indicators (Bollinger Bands, for example) can help traders determine possible reversal points, show a potential depth of a retracement and point to a trend’s direction. Each example of a trading strategy based on combinations of technical indicators has to be considered separately, backtested on a demo account and align to the individual trading strategy. Binary options traders should remember about principles of money management, as well as risk management rules.


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