RSI INDICATOR (RELATIVE STRENGTH INDEX)
RSI indicator is an oscillator which helps predict overbought and oversold market levels. Relative Strength Index (RSI) helps us define the market conditions where trending market has more potential to stop trending, reverse or enter a horizontal range. Learn how to trade binary options with RSI indicator.
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RSI Indicator Explained
RSI is a commonly used indicator, which is often combined with other indicators. Relative strength index can serve as a main indicator or as a confirmation indicator within many different trading strategies and systems. RSI indicator defines the strength or weakness of a traded asset, based on the closing prices in a selected time period.
RSI is an oscillator, which means it moves (oscillates) between the levels of 0 and 100. The default period setting for RSI is 14. Most commonly used are periods from 10 to 14, regardless of the time frame. Lower period settings will give more overbought and oversold signals and higher period settings will give less signals, however these are considered to be stronger. RSI levels below 30 are considered as oversold conditions and imply that the price should reverse and move up and levels above 70 are considered as overbought conditions and imply that the price should reverse downwards.
How to Trade Binary Options with RSI
When trading binary options, RSI Indicator can help us find profitable entry positions for market reversals in the overbought (above 70) or oversold (below 30) markets and also avoid bad trades in direction of continuation of the trends. By default it is not advised to enter up trades when RSI is above 70, or down trades when RSI is below 30, unless breakouts are being traded.
For more precise trade entries it is advised to combine RSI indicator with other support and resistance indicators, such as manually drawn horizontal support and resistance lines, trend lines or Fibonacci indicator. Understanding price action and candlestick patterns in the RSI overbought and oversold zones can give us strong signals for trading short pullbacks or longer reversal trade entries.