Trading Guide: Using the RSI Indicator for Binary Options

The Relative Strength Index (RSI) is one the most used indicators. This isn't due to some mystical power, but rather for its reliability even for binary options. Like all indicators, it is just a formula that calculates the relation between time and price.

The RSI is a technical momentum indicator that compares the magnitude of recent gains to recent losses, based on the average of up and down close days, in an attempt to determine overbought and oversold conditions of an asset.

This indicator is an oscillator, meaning that it gravitates or oscillates around a center line - in this case the 50 level line. Oscillators are indicators that are best used in ranging markets, hence the two 30 and 70 levels. When the indicator crosses the 30 line from below, it gives a signal to call and when it crosses the 70 line from above, it gives a signal to put.

Oscillators like the RSI, however, can be used in trending markets as well. Imagine a trending up EUR/USD chart and that the RSI has just gone into the overbought zone (above the 70 line). What better time to call than when the market is trending and the indicator tends to agree. Indicators should not be used alone. Using them blindly will result in failure.

Adjusting the indicator's parameters will not improve performance. It will, however, adjust its sensitivity. An RSI with a period of 5, instead of the standard 14, will make it quicker and it will respond with drawing sharper lines on the graph. It is imperative, on the other hand, that you match the options that you trade with the time frame of the chart/indicator. Trade 15 minutes options using the 15 minute time frame of whatever chart you are using.

Looking for divergence or convergence when using the RSI could also be a good idea when trading binary options. Divergence basically means that, the tops or bottoms that the chart and indicator make do not match. Say a bottom on the chart is lower than the previous bottom on the chart, but the bottom that the indicator draws is higher than the first previous indicator bottom. This mismatch is called divergence and indicates a possible reversal. After the divergence is recognized, a move up from below the 30 line will give a signal to call. Convergence is exactly the opposite, the bottoms or tops on the chart and indicator match and this indicates a continuation.

Using the RSI and relying solely on it is not recommended. Indicators are supplements to the chart, which is the primary source of information. The RSI will perform when the signals it gives correspond to the market conditions displayed on the chart. When they do not correspond, the signals will probably not be valid.