Table of contents:
- 1 Overbought and oversold levels in the RSI
- 1.1 Binary Options RSI Strategy: Chart combination
- 1.2 Settings of the RSI:
- 1.3 The “Asian session” trading
- 1.4 Trading before major economic events
- 1.5 Trading Binary Options with RSI – Part 2
- 1.6 Divergence (divergence/deviation) on the RSI
- 1.7 Which Binary Options Broker offers RSI trading?
- 1.8 Conclusion: The RSI is helpful for Binary Options
The RSI or Relative Strength Index is one of the most popular indicators to analyze the market. Most importantly, this indicator is an oscillator, which means that it appears in a separate window, usually below the chart window. On this page, I want to show you how to trade Binary Options with the RSI indicator.
See the picture below for the RSI indicator:
The idea of an oscillator is that you compare your own movement with the movement of the price. Most importantly, the oscillator shows the strengths and weaknesses of a movement.
The task of a trader now is to interpret the market based on the information provided by the oscillator. In terms of Binary Options trading, this means buying call or put options.
The default period for most platforms is 14. This means that the RSI will include 14 candlesticks in its calculations before outputting a value. Of course, you can change this value. But only do this if you really understand how the RSI works. The larger the period, the flatter the line becomes and the RSI loses its meaning.
Overbought and oversold levels in the RSI
The RSI is exclusively floating in positive territory. Between 0 and 100, to be precise. These are the extreme levels. In fact, as a trader, you will never see these levels.
Even the strongest movements, which can be caused e.g. by fundamental news, will rarely reach the 80 levels of the RSI. Therefore, it is no wonder that the standard interpretation of the RSI is the one that needs the most attention when breaking through the 30’s or 70’s level.
The most popular settings are 30/70 or 20/80. See the pictures below for an example:
- RSI – 30/70 level is good for normal markets
- RSI – 20/70 level is good for market news trading
As a rule of thumb, the 70 level indicates an overbought area, and as a trader, you will be looking for put options. On the other hand, a move below the 30 indicates an oversold area, which gives us an opportunity to buy call options.
However, there is one small problem with this approach – that everyone knows it. And if it worked 100% of the time, then everyone would make a lot of money. However, we know that this is not the case. That’s why there could be something wrong with it, right?
The answer’s somewhere in between. Overbought and oversold levels work! But – the approach works if the market is moving in so-called “ranges”, i.e. within certain areas – and not in a trend!
Therefore, the key to trading Binary Options with the overbought and oversold levels of the RSI indicator is to identify such ranges.
Binary Options RSI Strategy: Chart combination
As we said before, it is not good to only use the RSI indicator for open trades. The RSI is a lagging indicator which has not a good hit rate when it is used solo.
So I recommend to analyze the chart and search for support and resistance levels. In a combination of these two things the RSI is a good indicator to use. See the picture below.
Example for Chart Analysis and RSI:
On the price 1,180765, we see the market is forming a high and tests it again. Also, the RSI shows an overbought signal on the second test of the high. The chart is confirming a sell signal. So we can buy a put option.
See the next picture for another example:
Settings of the RSI:
As we discussed before the standard setting for the RSI is the period “14”, the oversold level is “30” and the overbought level is “70”. You can change the settings as you want. The period means how much candles of the chart are analyzed for the RSI.
For example, you choose a period of 10. Now the RSI formula analyzes the last 10 periods (candles). You can change the overbought and oversold settings for getting more significant signals. The chance is higher than the chart will turn around when the RSI is more overbought or oversold. You should do your own research about that.
The “Asian session” trading
One way to identify a range is to watch the Asian session. Typically, you will find good ranges there during the trading session.
Of course, it depends a lot on the underlying security, but currency pairs usually show good ranges in Asia. Therefore, using overbought and oversold ranges as entry points can bear good fruit.
You buy call options when the RSI has broken through the 30 levels and put options when the 70 levels has broken through. It’s very appealing to do this during the Asian session, but anyway, it usually works.
Still, watch out when the markets open in Europe, because at that point the strategy could fail.
Trading before major economic events
Traders don’t want to go out on a limb and trade a lot when important economic news is coming up. No one wants to take unnecessary risks.
That’s why the markets will usually move in a range until the news is released. A perfect example of this is when the NFP (Non-Farm Payrolls) is released.
Every first Friday of every month in the USA the job data is published. And because they are so important, the markets tend to move in a range beforehand and not set big trends until the data is released.
This is why trading with overbought and oversold ranges very often produces excellent results. But as always, there is a catch: make sure that the expiration date is BEFORE the announcement of the NFP!
In any case, overbought and oversold levels work as long as the trader can identify a range.
But as soon as a trend develops, the oscillator will get stuck in overbought or oversold ranges for some time. Then the trader has to adjust quickly.
Fortunately, the RSI can also show trend reversals. How this works can be found in the second part, which is dedicated to this wonderful indicator.
Trading Binary Options with RSI – Part 2
In the first part, we looked at how we can work with the RSI when the market is in a range. What can we do when the market forms a trend? Is there still a way to use the RSI?
The thing is that every oscillator – not just the RSI – is designed to identify so-called “fake moves”. When traders know that a move is potentially fake, they use this information to take a position in the opposite direction.
And then there is something else: The current price always shows the movement of the current candle, whereas the RSI or any other oscillator includes the price of a defined number of previous candles.
So if it is a question of trusting either of these two values, then we should believe the oscillator.
Divergence (divergence/deviation) on the RSI
A divergence indicates a deviation of a movement compared to the price movement. Typically, the RSI does not confirm the price movement.
To understand a divergence, one must look at how the price is moving and then compare the movement with the movement of the RSI.
In a bullish market, it forms successive higher highs. If this is also found in the RSI, then these two are consistent. If however, the RSI does not confirm the new higher high, then bearish divergence forms. In this case, binary options traders will buy put options.
A bullish divergence occurs when the RSI of the last lower low in a bearish trend does not confirm the last lower low. Therefore, traders will buy call options in this case.
A divergence is even more meaningful when it is in an overbought or oversold range. To be precise, if both higher highs form above the 70 level – all the more powerful if the second one is already forming below it. The same is true for a bullish divergence if both lower lows form below the 30s level. If this happens, the chances for a jump up are very good.
But as always – trading is not that easy. Binary options traders need to match the expiration date with the time frame in which the divergence forms. In addition, the market can be in a state of persistent divergence if it is in a strong trend – longer than a trader can afford. This is why traders choose different approaches.
When you think about it, traders who trade divergences work with potential trend reversals. When trading, this is the riskiest form of trading. But aggressive traders love it. More conservative traders will not do this. They will wait for the trend reversal and then trade recurring patterns in the direction of the new trend.
If divergences do not form in the overbought or oversold area, this does not mean that there is no reversal. Nevertheless, it is advisable to ignore them, as they are only a consolidation before the original trend sets in.
Which Binary Options Broker offers RSI trading?
Most trading platforms offer the RSI trading indicator. When you want to trade Binary Options it is important to have a reliable broker. For example, IQ Option offers a customizable platform where you can add the RSI indicator and change the settings as you want.
In addition, it is very important that the broker is trustworthy. There are some companies that try to scam their customers. So you need to invest with a reliable platform. Check out the regulation and trading conditions. Also, professional support would be helpful.
I tested a lot of different brokers and in the next table, you will see the best 3. You can visit our Binary Options Broker comparison, too. Try out a free demo account to practice trading with the RSI:
Conclusion: The RSI is helpful for Binary Options
The RSI is a powerful indicator for a Binary Options trader. From my experience, most platforms are offering this indicator for free. It is depending on the RSI setting which signals you will get. I recommend not only to use the RSI indicator alone for trading
You should use this indicator as confirmation for your chart analysis. If you find support and resistance areas in the chart you can confirm the trade with the RSI indicator. This strategy works well and has a good hit rate.
Read my other articles about Binary Options:
- 15 Rules for Binay Options – Tips & Tricks
- 5 best Binary Options Broker 2020 – Review & Comparison
- Are Binary Options a gamble?
- Are Binary Options a scam?
- Are Binary Options Robots a Scam? – Honest review
- Best Binary Options App – Comparison & Review
- Binary Option Markets
- Binary Options – Call and Put
- Binary Options – Range Options – Boundary Options
- Binary Options – Touch Options
- Binary Options 60 seconds Trading Strategy & Tips
- Binary Options Bollinger Bands Strategy
- Binary Options commodities trading
- Binary Options demo account – Recommended For Beginners
- Binary Options Money Management Strategy
- Binary Options News Trading
- Binary Options regulation – Why is it important?
- Binary Options review – Critic and warning
- Binary Options RSI Strategy
- Binary Options trend following strategy
- Binary Options volatility strategy
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- Chart analysis for Binary Options
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- Hedging Binary Options: Can You Hedge Against Losses?
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- How to avoid Binary Options Scam Brokers
- How to trade Binary Options – Trading Tutorial
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- Trade Binary Options with MetaTrader
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- Warning about Binary Options – A form of betting
- What are Binary Options?
- Why Binary Options Signals are a scam