RSI Indicator or Relative Strength Index

Today we will talk about one of the most popular Forex indicators used by traders - RSI indicator (Relative Strength Index) or Relative Strength Index.

 

The RSI indicator or Relative Strength Index was developed by Wallace Wilder and introduced to the general public as early as 1978. This tool is actively used by binary option traders, who have found a unique opportunity to improve their trading results using a leading algorithm.

 

The essence of the indicator is that it compares the number of price falls and the number of moments of its growth. The time period is selected as the settings. This tool refers to Forex oscillators. It works perfectly during periods of lateral movement in the market. However, at times when a strong trend begins, its indicators may fall.

 

 

 

Characteristics of the RSI indicator

Forex Trading Platform: TradingView

Time scale: any

Basic asset: any

 

 

Description of the RSI indicator

The only variable is a period that can be changed depending on market activity. The standard value is 14. If the market is active, it is recommended to change the period upwards to filter out false movements. If the market is calm, then the period can be reduced.

 

As in all oscillator indicators, the main signal to enter the transaction will be the divergence in price and indicator behavior (divergence).

 

However, the creator of this indicator, Mr. Wilder, argued that the market sooner or later changes its direction of movement because it is periodically overbooked or resold. Therefore, the signal for sale will be to find the price long above 70, which indicates the overbought of the market.

 

The signal for purchase will be the long-term location of the price under level 30, which will say that the market is resold and big purchases are coming.

 

As noted above, this algorithm compares periods of price rise and fall.

 

When the curve of the indicator grows, the values of the algorithm are higher than one.

When the indicator curve decreases, the algorithm values are less than one.

An interesting point we want to draw your attention to is the presence of areas of overbought and resale in this indicator. These zones help to obtain more trade signals and significantly diversify algorithm strategies.

 

Levels 70 and 30 are used to determine overbought and resale. However, traders can self-define them in settings. Some resort to levels of 20-80.

 

When the indicator curve hits areas above 70, it means that the price of the underlying asset is in an overbought state and a reversal may soon occur. When the indicator curve falls into the area below 30, the price of the underlying asset is in the resale area and can be turned up.

 

It is worth remembering that this rule works perfectly only for fleeting markets. If a trend appears on the market, the curve may be sufficient

 

As noted above, this algorithm compares periods of price rise and fall.

 

When the curve of the indicator grows, the values of the algorithm are higher than one.

When the indicator curve decreases, the algorithm values are less than one.

An interesting point we want to draw your attention to is the presence of areas of overbought and resale in this indicator. These zones help to obtain more trade signals and significantly diversify algorithm strategies.

 

Levels 70 and 30 are used to determine overbought and resale. However, traders can self-define them in settings. Some resort to levels of 20-80.

 

When the indicator curve hits areas above 70, it means that the price of the underlying asset is in an overbought state and a reversal may soon occur. When the indicator curve falls into the area below 30, the price of the underlying asset is in the resale area and can be turned up.

 

It is worth remembering that this rule works perfectly only for fleeting markets. If a trend appears on the market, the curve can stay above 70 or below 30 long enough, thereby forming a large number of false signals.

 

Trade signals of RSI

The RSI indicator offers several types of trading signals. The first of them is trend work. This algorithm assumes curve oscillations ranging from 0 to 100. In the middle is elevation 50. As soon as the indicator curve overcomes it from the bottom up, a signal appears to purchase the Call option.

 

The same, only with accuracy to the opposite, can be said about the signal when the curve of the indicator overcomes the middle level from top to bottom. In such a situation, the trader is advised to purchase the Put contract.

 

The second type of signals appears when the indicator curve leaves the overbought and resale areas. Describe this type of signal more specifically. If the indicator curve breaks from top to bottom at 70, a signal appears to purchase the Put option. In such a case, it can be expected that the upward movement will change downward (within the trading range).

 

The reverse signal for the purchase of the Call option appears when the RSI indicator curve crosses the bottom-up mark 30.

 

There is another type of signal that Forex traders can use, but that will not be suitable for trading binary options - divergence. It appears when price highs or lows are not confirmed by new highs or indicator lows. This difference in price and algorithm most often indicates a reversal.

 

But divergence has no clear rules for working out signals, which is unacceptable for the short-term time-limited binary options trade.

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